Third Party Funding in International Commercial Arbitration: Indian and International Perspective By: Harleen Kaur

The Author, Harleen Kaur, is a 4th year student of University School of Law and Legal Studies, GGSIPU. She is currently interning with LatestLaws.com. 

ABSTRACT

Third-party funding in international commercial arbitration is one of the most current and controversial issues in international arbitration. Third-party funding is the system whereby a third-party funder finances, partly or fully, one of the parties' arbitration costs. In case of a favorable award, the third-party funder is generally remunerated by a previously agreed percentage of the amount of the award. In case of an unfavorable award, the funder's investment is lost. One of the numerous issues raised by the involvement of third-party funders in international commercial arbitration proceedings is arbitrator conflict of interest due to nondisclosure of the involvement of the third-party funder in the process. In this article, firstly the concept of 'third-party funding in international commercial arbitration’ is explained, then arbitrator conflict of interest implicating third-party funders is examined. Concept of Third Party Funding has also been discussed in this article.

Keyword: international commercial arbitration, third party funding, India's perspective, latest developments in third party funding regulation.

INTRODUCTION

International commercial arbitration is a means of resolving disputes arising under international commercial contracts.  It is used as an alternative to litigation and is controlled primarily by the terms previously agreed upon by the contracting parties, rather than by national legislation or procedural rules.  Most contracts contain a dispute resolution clause specifying that any disputes arising under the contract will be handled through arbitration rather than litigation.  The parties can specify the forum, procedural rules, and governing law at the time of the contract.

International arbitration is a composition. It initiates as a private agreement between the parties. It progresses by way of private proceedings, in which the wishes of the party play a symbolic role. Still, it ends with an award that has binding legal force and effect, and which, under opportune conditions, the courts of most countries of the world will recognize and enforce. In short, this originally private process has a public effect, achieved with the support of the public authorities of each state and asserted through that state's national law. This interrelationship between national law and international treaties and conventions is of critical importance to the effective operation of international arbitration.

Arbitration can be either “institutional” or “ad hoc.” The terms of the contract will dictate the type of arbitration.

1. Institutional Arbitration – An institutional arbitration is one that is governed by an expert arbitral institution under its own rules of arbitration. There are many such institutions, some better established than others. Amongst the most well-known are the ICC, ICSID, the LCIA, and the International Centre for Dispute Resolution (ICDR). There are also regional arbitral institutions (for instance in Beijing and Cairo) and there are chambers of commerce with a well-established reputation, including those of Stockholm, Switzerland, and Vienna.

The rules of these arbitral institutions lean to follow a broadly similar model. Some rulebooks reflect the determinations of civil law (following the model of the ICC), whereas others derive greater revelations from the common law. What is common to all sets of rules is that they are formulated specifically for arbitrations that are to be supervised by the concerned institution and they are usually integrated into the main contract between the parties utilizing an arbitration clause.

2. Ad hoc Arbitration – Ad hoc arbitrations are operated independently by the parties, who are accountable for deciding on the forum, the number of arbitrators, the method that will be followed, and all other aspects of executing the arbitration. As a matter of choice, and more usually, the parties may settle on that the arbitration will be conducted without associating an arbitral institution, but according to an entrenched set of rules, such as those of UNCITRAL, which provides a rational framework within which the tribunal and the parties may add any exhaustive provisions as they wish- for example, rules providing for the submission of pre-trial briefs or the agreement of expert reports.

The types of law that are applied in arbitration include international treaties and national laws, both procedural and substantive, as well as the procedural rules of the relevant arbitral institution. The 1923 Geneva Protocol and the 1927 Geneva Convention dealt with the perception and imposition international arbitration agreements and the execution of foreign arbitral awards. These were then followed by various regional conventions, e.g., the Bustamante Code of 1928 and the European Convention of 1961, until finally the most important convention in the field of international commercial arbitration, the New York Convention, was declared in 1958.

The New York Convention continued where the Geneva treaties left off.[1] Its title as a ‘Convention on the Recognition and Enforcement of Foreign Arbitral Awards’ is a partial misnomer. The Convention’s beginning, is in fact, the recognition and enforcement of arbitration agreements.[2] Having provided for recognition of the validity and enforceability of arbitration agreements, it also provides for the international enforcement of awards that comply with the specified criteria.

In the context of international treaties and conventions, a concise notice must be made of BITs. Historically, states doing business with each other often entered into 'treaties of friendship, commerce, and navigation'. In order to stimulate trade and investment, the states concerned would grant each other favorable trading conditions and agree that any disputes would be resolved by arbitration. Such treaties have now given way to bilateral investment treaties, or BITs as they are more commonly known.

The model law began with a proposal to reform the New York Convention. This led to a report from UNCITRAL[3] to the effect that harmonisation of the arbitration laws of the different countries of the world could be achieved more effectively by a model or uniform law. The final text of the Model Law was adopted by resolution of UNCITRAL, at its session in Vienna in June 1985, as a law to govern international commercial arbitration. A recommendation of the General Assembly of the United Nations commending the Model Law to Member States was adopted in December 1985.

The Model Law has been a major success. The text goes through the arbitral process from beginning to end, in a simple and readily understandable form. It is a text that many states have adopted, either as it stands or with minor changes, as their law of arbitration.

Party consent is an important requirement for international arbitration. Such consent is demonstrated in an agreement to arbitrate which will be generally be concluded ‘in writing’ and signed by the parties. Third parties to an arbitration agreement have been held to be obligated by such an agreement in a variety of ways:

1. By operation of the ‘group of companies’ doctrine, pursuant to which the benefits and duties arising from an arbitration agreement may, in certain circumstances, be extended to other members of the same group of companies.
2. By operation of general rules of private law- principally those governing assignment, agency, and succession.

The English Contracts (Rights of Third Parties) Act 1999 provides the third party may enforce a contractual term where the contract expressly provides that the third party may do so or purports to confer a benefit on the third party.[4] Where the contract contains an arbitration agreement, the third party is bound by the agreement and constrained to follow the arbitral process.

THIRD PARTY FUNDING

The last few years have seen a marked increase in funding activity, initially focused on investor-state arbitration, but now spreading to commercial international arbitration. However, unlike in national litigation where disputes are decided by court-appointed judges, the use of third-party funding in private arbitration, with party-appointed arbitrators, has given rise to various ethical and procedural issues. Third Party Funding (TPF) has become a "hot topic" in the international arbitration community and has given rise to several concerns. 

Third Party Funding is the arrangement whereby an unrelated party provides financial support to a party in return for a share of the eventual monetary award. Typically, the funding will cover the funded party's legal fees and expenses incurred in the arbitration. The funder may also agree to pay the other side's costs if the funded party is so ordered, and provide security for the opponent's costs. 

As the market has developed, the range and sophistication of funding products and structures available have broadened. There is no one size fits all and the description above is funding at its most basic. Third party funding, or "litigation finance" as it is commonly referred to, has evolved. In addition to funding one-off cases, litigation finance is being used for a broader range of purposes, with the proceeds of the litigation or arbitration being used as collateral. Another recent trend is the development of portfolio funding, where funders provide a funding package that covers a portfolio of cases. Although third-party funding has a considerable upside – improving access to justice is an oftentimes cited advantage – it also carries certain risks and challenges, for example, those relating to conflicts of interest, disclosure and (security for) costs. The recent expansion of third-party funding in international arbitration and ongoing debates on this topic have spurred notable developments with regard to its regulation, both on a national and an international level.

Third-party “funding in international commercial arbitration is one of the most current and controversial issues in international arbitration”.

If looking to fund on a one-off case basis, the following is a useful preliminary checklist:

“Funders are unlikely to provide funding for cases that do not involve damages. Given that funders receive their return by reference to recoveries made, they are primarily interested in claims with a damage’s outcome. As such, funding is generally only available to claimants or defendants with a counterclaim. 

Unless they specialize in funding smaller claims, funders will generally only fund one-off cases where likely damages are assessed at £10 million plus. Funding an arbitration matter is a high-risk investment, and funders will require a certain investment to quantum ratio. This usually requires a damages outcome of at least £10 million.

Funders will require good prospects of success. They will undertake their own separate analysis of the claim and only fund it if they have confidence in it and the way it is being advanced.

Funders will want to know if the target (i.e. the respondent) can meet the claim, costs and interest. Also, and particularly where it is a state, what is its payment record in relation to arbitration awards? The funder will also want to know where assets are situated; enforcement risk is a key concern. If situated in jurisdictions where enforcement is difficult, that may deter some funders. Other considerations, including whether the target will fight to the bitter end, may also influence the funder.

The seat of the arbitration is important as that will determine whether funding is permitted under local law. The place of enforcement will also be important as the fact of funding may be used to raise public policy arguments to frustrate enforcement”.

Why is Third Party Funding used in International Arbitration?

There are principally two reasons why parties seek third party funding in international arbitration.

1. Third party funding enables a claimant to pursue a claim which it would otherwise not be able to afford, and this facilitates access to justice.
2. Another significant benefit of third-party funding in international arbitration is that it provides a mechanism through which the claimant can share with the commercial funder the financial risk and operational burden in pursuing his claim.

Third Party Funding in Arbitration – India’s Perspective

The concept of third party funding is statutorily recognized in civil suits under the Civil Code of Procedure in states such as Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh. This consent to third-party funding can be adduced from the Civil Procedure Code 1908, which governs civil court procedure in India. Order XXV Rule 1 of the code (as amended by Maharashtra, Gujarat, Madhya Pradesh, and Uttar Pradesh)[5] provides that the courts have the power to secure costs for litigation by asking the financier to become a party and depositing the costs in court.

Order XXV of the Civil Procedure Code was amended for Maharashtra by Bombay High Court Notification P 0102/77, dated September 5, 1983.

It reads as follows:

“3. (1) Where any plaintiff has for the purpose of being financed in the suit transferred or agreed to transfer any share or interest in the property in the suit to a person who is not already a party to the suit, the Court may order such person to be made a plaintiff to the suit if he consents, and may either of its own motion or on the application of any defendant order such person, within a time to be fixed by it, to give security for the payment of all costs incurred and likely to be incurred by any defendant. In the event of such security not being furnished within the time fixed, the Court may make an order dismissing the suit so far as his right to, or interest in the property in suit is concerned, or declaring that he shall be debarred from claiming any right to or interest in the property in suit….”

The Arbitration and Conciliation Act, 1996 makes no mention of third party funding. The presence of a third party funding clauses in specific state amended Civil Procedure Code cannot adduce the legality of a similar clause in arbitrations. Therefore, any possible third party funding agreement would depend on it being a valid contract under the Indian Contract Act, 1872.

The practicalities of routing third-party funding into and out of India pose a separate set of challenges. This process is subject to the Foreign Exchange Management Act 1999 (‘FEMA’), and the various rules and regulations thereunder. FEMA classifies all transactions involving foreign exchange and/or non-residents into two primary categories – current and capital account transactions.[6] Since FEMA does not explicitly classify third-party funding as either a current or capital account transaction, it is uncertain as to how such funds would interact with the regulatory regime, especially since both these transactions are viewed very differently under FEMA rules and regulations.[7]

In a recent Execution Petition filed before the Hyderabad High Court,[8] the respondents have sought to oppose the execution of the arbitral award made by Sir Phillip Otton in a London- seated arbitration subject to the International Chamber of Commerce (ICC) rules. One of the grounds for challenge are that the petitioners had entered into a third-party funding agreement, and that execution should not be permitted as the funding agreement is champertous in nature and therefore, against the public policy of India. Although the matter is sub judice, it is the authors’ view that in light of the Indian jurisprudence outlined above including provisions of the Code of Civil Procedure 1908, such agreements are not illegal and can be enforced in India, barring the public policy considerations highlighted above.

The setting-up of the Mumbai Centre for International Arbitration (MCIA)[9] in October 2016, MCIA is not the first institutional arbitration center to be set up in India. The Delhi High Court established the Delhi International Arbitration Center in 2009 and the Kolkata International Arbitration Center was set up in 2015. It has also been reported that the Punjab and Haryana High Court has approved the setting up of an International Arbitration Center (IAC) in Gurgaon to provide a platform for business houses to negotiate commercial disputes. The proposal has now been forwarded to the state government. Gurgaon hosts half the Fortune 500 companies in India aside from top-notch India corporate firms, ‘after Mumbai, India's second business      Arbitration      Centre in      Gurgaon'      (The      Times of      India,      20      January    2017) and the recent introduction of the New Delhi International Arbitration Centre Bill 2018 before the Lok Sabha as well as the Arbitration & Conciliation (Amendment) Bill 2018 signals a move towards encouraging institutional arbitration in domestic as well as international disputes as well as seeking to improve the overall arbitration landscape in India. This also showcases India’s potential to develop and become an attractive alternative arbitration hub in the region to the Singapore International Arbitration Centre (SIAC) and the Hong Kong International Arbitration Centre (HKIAC) as well as the upcoming ICC Court case management office in Singapore (a collaboration between the Singapore Ministry of Law and the ICC International Court of Arbitration).[10]

Regulatory Framework for India

Before delving into the possible regulatory framework that India might need to adopt for regulating third-party funding, as a first step, the authors recommend opening the discussion on the subject to the public and the interest groups involved. The discussion on third-party funding in India has been largely restricted to the legal fraternity and academic circles, while disputants who would rely on third-party funding have little knowledge of the concept and its benefits. With rapidly increasing reliance on arbitration in India, questions on the cost of funding such arbitrations and the role of third-party funding in alleviating such cost burden on the parties have necessitated a transparent and inclusive discussion on the subject.

The Law Commission of India ('Law Commission') occupies a unique place in the landscape of Indian legislative reform and would play an instrumental role in facilitating a comprehensive public consultation process on third-party funding.[11] The Commission is neither a constitutional nor statutory body, but an advisory body constituted by the Government of India and empowered to recommend legislative reforms. As an advisory body entrusted with recommending legislative reform, its reports are not binding on the Government. That said, Article 39A of the Directives Principles of State Policy[12] enshrined in the Indian Constitution also urges the State to take definitive steps towards securing equal justice for its citizens. Hence, in addition to the importance of the legislative reforms recommended, the Law Commission reports are also held in high regard owing to the comprehensive research-oriented approach adopted, which often results in inconclusive recommendatory reports.

Soft law and light-touch approach

One of the issues to be dealt with at the time of developing regulation would be whether to adopt the hard or soft law approach to regulating third-party funding in India. A hard law approach would result in binding regulations on the funders and parties involved. However, given the newness of the third-party funding industry and its multiple facets that continue to emerge, it would be advisable for India to adopt a soft law approach. Non-binding regulations that function as a code guiding the conduct of parties and funders would present ideal testing waters for third-party funding before it becomes commonplace in India. Thereafter, once third-party funding is an established industry in India, these regulations could inspire legislation, if necessary.

A good example of the soft law approach can be seen in the Code of Conduct for Litigation Funders (‘Code’) issued by the Association of Litigation Funders of England and Wales (‘ALF’).[13] While the Code has been essentially developed for regulating funding in litigation and domestic arbitration in England & Wales, the premise of funding by a third party remains the same for international commercial arbitration. The ALF Code provides an excellent starting point for India when considering the aspects of third-party funding that would require immediate regulation.

Different scenarios which may arise in enforcing arbitral awards where the claimant has been funded by a third party

The enforcement of third party funding agreements, and the arbitration awards where a third party had funded the claimant, can differ depending on where the award or the third party funding agreement is being enforced. Some of these circumstances are:

1. The seat of arbitration: If an award has to be enforced at the seat of the arbitration then the said enforceability would depend on the seat of arbitration and its laws regarding the legality of the third party funding agreement. The decision by the Irish Supreme Court in the Persona Digital Telephony Limited & Sigma Wireless Networks Limited v The Minister for Public Enterprise, Ireland and the Attorney General[14]  clearly illustrated the fact such agreements can be said to be violative of a country's public policy. The Irish Supreme Court had held that due to the presence of a third party funding agreement the arbitration award violated the public policy of Ireland and therefore the award was liable to be set aside.

But at the same time, it should be noted that international arbitration has an increasing trend of accepting the trend of third party funding. The tribunal in Giovanni Alemanni v. The Argentine Republic[15], Decision on Jurisdiction and Admissibility, 17 November 2014, opined as follows: “the practice [of third-party funding] 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.” A number of important risks related to the recognition and enforcement of funded arbitral awards were raised by Ben Knowles and Paul Baker in “Enforcing a funded award in an anti-funding environment”[16]. The focus in the article was directed on enforcement of awards rendered in arbitrations involving third-party funders in countries where funding is impermissible. It cannot be ruled out that courts in such countries develop a tendency to refuse enforcement of funded awards. As for countries bound by the New York Convention, the question ought to be raised whether such an action would even be allowed. The authors of the mentioned article emphasize the valid point that signatory countries may not refuse enforcement of arbitral awards, save upon a few narrow grounds. The only potentially applicable ground that could merit such refusal of enforcement is public policy, and it remains to be seen whether any of the countries engaging in skepticism towards third-party funding will develop any case law in this regard.

Therefore, it can be inferred that there is no uniform opinion on whether the execution of an arbitration award can be challenged in a jurisdiction based on the third party funding agreement. There are decisions in favor of allowing the executions of the awards based on the New York Convention and this decision has found favor with the leading academicians of the field. But, as the above-cited Irish Supreme Court case has illustrated, a country can also deny the execution of an award on the sole reason that the award was obtained by way of third party funding. Even though such decisions may discourage a funder, the international trend is indicative of the fact that the third-party funding agreements would soon be a widely accepted and legitimate practice.

2. Third party funding agreements entered into where the claimant resides: In this scenario, a claimant enters into a third party funding agreement and this agreement would be legally valid in the jurisdiction the claimant resides at. But would this agreement be legally valid when the award is being enforced in a different jurisdiction? In a recent decision by the English Court in Essar Oilfields Services Limited v Norscot Rig Management PVT Limited[17], the claimant was allowed to recover legal costs where it was funded by a third party. The Scottish company had entered into a third party funding agreement to fund the arbitration against Essar. The arbitral tribunal had upheld the validity of this agreement and this was upheld by the English Court while enforcing the award. Therefore, by way of this example, it can be safely assumed that the validity of the third party funding agreement at the claimant’s location lends credibility to the validity of the agreement. At the same time, it needs to be highlighted that the English Courts are increasingly adopting a pro-arbitration stance. Therefore, the validity of the award would depend on the approach adopted by the court executing the arbitration award.

3. The validity of the third party funding agreement and the arbitration award at the place of execution: After a bare perusal of the above-cited judgments and academic literature it can be stated that the place where the arbitration award has to be executed should be a jurisdiction where third party funding agreements are legally accepted. A third party funding agreement can be legally sound where it was entered into but an award can be set aside by the executing court if that jurisdiction does not recognize third party funding agreements. The leading academicians and international arbitration awards have opined that interpretation of the New York Convention should be the only guiding factor when executing such awards. A narrow interpretation should allow for such awards to be passed without courts applying their national laws restricting third party funding agreements.

Concerns regarding Third Party Funding in International Arbitration

Two specific concerns have been raised with regard to third party funding in international arbitration:

1. the fact that a third-party funder covers a party's legal fees could have an impact on the independence of arbitrators. A party may be funded by a third-party funder with which one of the arbitrators has a conflict of interest. For instance, the arbitrator in the first arbitration in which one of the parties is funded by a funder, maybe the counsel to the claimant in another arbitration in which the claim is funded by the same funder. This impairs the independence and impartiality of the arbitrator and may have a direct impact on the valid constitution of the arbitral tribunal, which in turn may make the award subject to challenge.
2. the fact that a claimant is supported by third party funding might prove that the claimant is impecunious and thus unable to pay an adverse cost award. Tribunals often allow the prevailing party to recover reasonable costs from the losing party. Given the length and complexity of international arbitration proceedings, the amount of costs awarded to the prevailing party can be quite significant. The existence of third-party funding is likely to give rise to a situation where the self-funded party may suspect that the party obtaining funding is impecunious, and will be unable to pay any adverse cost award. The arbitral tribunal lacks jurisdiction to order the third-party funder to pay adverse costs because the funder is not a signatory to the arbitration agreement or a party to the arbitration proceedings. This may cause the self-funded party to seek security for costs, to avoid a situation where the impecunious award debtor may not pay.

Advantages and Disadvantages

A potential claimant may approach a funder for various reasons:

• Necessity: Arbitration can be expensive. If a claimant does not have the means to pursue a meritorious claim, funding may well be its only option.
• Risk management: Claimants with the funds to arbitrate may want to lay off some of the risk associated with costly arbitration, and be prepared to give up a proportion of any recoveries to do so. It also enables a company to invest that money elsewhere. Besides, the funded party is relieved of costs pressures and cash-flow issues associated with the legal costs of the arbitration.
• Validation: Funders are only interested in good claims. They will, therefore, conduct extensive due diligence and carry out their analysis of the merits before agreeing to provide funding. This objective analysis may assist the claimant to shape its case strategy, and may also encourage early settlement once the other party is made aware that the claim has the backing of a funder.

However, there are also disadvantages to using third party funding: 

• A successful claimant will generally have to pay a significant proportion of his or her recoveries to the funder.
• Although funders are generally prohibited from taking undue control or influence in an arbitration, there may be some loss of autonomy on the part of the funded party (in particular when considering settlement) as funders may reserve the right of approval of the settlement. 
• Substantial costs can be incurred when packaging the case for presentation to a funder. These will have been wasted if the application for funding is unsuccessful. Even if successful, funders are not usually liable for any costs incurred before the funding arrangement is put into place, including the costs of packaging and the negotiation of the funding arrangements.

Regulations for Third-party Funders

First of all, domestic rules and regulations are likely to be inconsistent among jurisdictions, opening the door to "forum-shopping with parties selecting a governing law that is favorable or even silent on the matter". Second, there is a risk of "over-regulating", thereby effectively restricting the "use and application of third-party funding more than is necessary". Third, it is virtually impossible to address all issues and concerns with a single set of clear and binding rules; the issues associated with third-party funding may "differ from case to case, from one jurisdiction to another and are bound to change over time, as will be the way in which third-party funding is practiced and how it is perceived".[18] There is no “one size fits all” and flexibility is key. This leaves us with the roles arbitral institutions and international guidelines can play, which in our view may be more effective in this context. Institutional arbitration rules have a broader applicability than domestic laws and are more specifically designed for the arbitral process. International guidelines are generally non-binding and offer greater flexibility. The 2014 International Bar Association Guidelines on Conflicts of Interest were the first to address third-party funding to provide practitioners with guidance, and not without success. One would, therefore, propose "not to opt for a highly fragmented system of national laws regulating third-party funding, but to further develop a set of non-binding guidelines on which practitioners can rely when being confronted with issues of third-party funding in international arbitration”.[19]

Maintenance and champerty 

Maintenance refers to the funding or providing of financial assistance to a holder of a claim, which allows the claim to be legally pursued when the funder or provider of financial assistance holds no connection or valid interest in the claim itself. Champerty takes it one step further by adding that this funder or financial provider has a direct financial interest in the outcome of the claim. Here the funder provides the money in exchange for a portion of the damages should the claim prevail. The reasons surrounding why these acts were considered morally and ethically against public policy such as to make them illegal can best be described by the following quotes.

Historically, in common law jurisdictions, the principles of "maintenance" and "champerty" prevented the funding of litigation by third parties. The underlying justification for this was to avoid third parties profiting from litigation in which they had no legitimate interest, as there was concern that this would result in frivolous or vexatious litigation. However, as part of the desire to improve access to justice, jurisdictions have adopted a more pragmatic approach to third party funding.  

In some jurisdictions, such as Ireland, maintenance and champerty remain torts and crimes. In May 2017, the Irish Supreme Court blocked a third party funder from funding a major case against the Irish state on grounds of champerty. However, attitudes in Asia towards third party funding are changing. Both Hong Kong and Singapore have introduced legislation to permit and regulate its use in international arbitration. 

Jurisdictions that permit third party funding 

Legislation in many jurisdictions is silent as to the legality of third party funding (particularly in the case of arbitration) and it is, therefore, difficult to ascertain whether the courts in those jurisdictions will strike down or uphold a particular funding agreement in relation to an arbitration. 
Where third party funding is permitted, third party funders may be subject to regulation. Regulation of third party funders is dealt with in various ways. Set out below are the forms of regulation in England and Australia.

England and Wales

Third party funding is not subject to formal regulation in England and Wales. Self-regulation is preferred in the form of a code of practice. The Code of Conduct for Litigation Funders was finally published in November 2011 together with the formation of the Association of Litigation Funders of England and Wales.[20] The Code is binding on all members of the Association and regulates the funding of "litigation, arbitration or other dispute resolution procedures". 

Australia

Contingency fees are prohibited and so lawyers cannot have a financial interest in any awards received by their clients (that is, they cannot be de facto litigation funders). However, independent third party funders are permitted in both litigation and arbitration.
 As a safeguard against frivolous or vexatious litigation, the court rules in each jurisdiction (and the common law) give courts the ability to safeguard the administration of justice and make orders concerning their processes (including oversight of arbitral proceedings) to avoid abuses of the process by litigation funders.

There is no regulation for capital adequacy of third party funders in Australia (unless the funder chooses to apply for a financial services license, but this is not mandatory). This is because the law exempts litigation funders from being regulated managed investment schemes on the condition that the funding arrangement maintains adequate practices for managing any conflict 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. 

Latest developments in third-party funding regulation

Singapore

On 10 January 2017, the Singapore Parliament passed the Civil Law (Amendment) Act (Bill No. 38/2016), which entered into force in March 2017. The Act amends Singapore law to permit third-party funding for international arbitration and related court proceedings under certain conditions, with further regulations prescribing specific eligibility requirements for funders. Until then, third-party funding was prohibited in Singapore and currently, the funding of state court litigation is still restricted.

In anticipation of the newly adopted legislation in Singapore, the 2017 Investment Arbitration Rules (effective as of 1 January 2017) of the Singapore International Arbitration Centre (SIAC) grant an arbitral tribunal the power to order disclosure of the existence of a funding arrangement entered into by one of the parties to the proceedings, the identity of the third-party funder involved and further details on the third-party funder’s involvement and interest in the outcome of the case.

On 31 March 2017, SIAC also issued a Practice Note on Arbitrator Conduct in Cases Involving External Funding. This note includes standards of practice and conduct providing arbitrators with guidance on questions relating to independence and impartiality, disclosure and costs.

Hong Kong

Hong Kong has approved third-party funding of arbitrations seated in Hong Kong by adopting the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 on 14 June 2017. This development is similar to the amendment of the law of Singapore, in the sense that the new national legislation aims at regulating previously prohibited third-party funding in international arbitration.

On 31 August 2017, the China International Economic and Trade Arbitration Commission Hong Kong Arbitration Center (CIETAC) released its Guidelines on Third Party Funding in Arbitration. These guidelines set out certain principles of practice and conduct which parties and arbitrators are encouraged to observe in respect of actual or anticipated arbitration proceedings administered by CIETAC in which there is or may be an element of third-party funding.

Hong Kong and Singapore are the first countries to explicitly regulate third-party funding in international arbitration on a state level. Although it should be stressed that the reason for this is strongly linked to the fact that before these legislative changes third-party funding of legal proceedings was altogether prohibited in these two states (based on the common law doctrines of maintenance and champerty), the new legislation does more than merely allowing third-party funding in prescribed cases. The new Singapore and Hong Kong laws make mandatory the disclosure of the existence of third-party funding and the identity of the funder involved. Such rules on a national level are entirely new in the world of arbitration.

Ireland

In contrast to the above, the Irish Courts have taken a different approach to the subject of third-party funding. The most recent Supreme Court decision on the issue was handed down in 2017, in the case of Persona Digital Telephony Limited and Another v The Minister for Public Enterprise, Ireland and Others [2017] IESC27 (“Persona”)[21]. Here, the Court was invited to interpret the rules in light of modern justice systems and permit funding provided proper protections were built in. The Court refused to develop the law in this way and affirmed that as long as there is a third-party funding in a case in return for a share of the proceeds it is automatically unlawful. It was held that third-party funding of litigation falls under the torts and crimes of maintenance and champerty, established in statutes dating as far back as the 14^th century, and as such it was not for the Court to interfere and instead, it was up to the lawmakers to change the law. Consequently, the Court declined to allow Persona Digital Telephony Limited to obtain third-party funding.

United States of America

In the USA, various state legislatures have filed numerous pieces of legislation primarily aimed at consumer-side TPF since the beginning of 2013.[22] There are still no federal laws that are directly related to TPF, nor does the Federal Arbitration Act mention TPF. This means that potential users of TPF in the U.S. must investigate case law and statutes on a state-by-state basis, which is not necessarily positive for the further growth of the TPF industry in the U.S.[23] Furthermore, the majority of both the case law and statutes are focused on domestic litigation and not on international arbitration, which makes it nearly impossible at this stage of the debate to draw definitive conclusions about the status of TPF in the U.S. The lack of sufficient data seems to be the recurring theme in the story of TPF in international arbitration and it is this author’s view that making educated guesses about the status of TPF in certain jurisdictions is what we are condemned to do until more case law and statutes on TPF are issued

ICCA-Queen Mary Task Force on third-party funding in international arbitration (“Queen Mary Task Force”)

The Queen Mary Task Force published a draft report for public comment in September 2017, with a final report anticipated in 2018. The draft report acknowledges that a better understanding of what third-party funding is and the issues it raises in international arbitration is necessary and would be beneficial. The report aimed to open up discussion on this issue of third party funding and in doing so may provide for beneficial guidance, greater consistency and more informed decision-making in addressing issues relating to third-party funding

The report provides an analysis of the dispute funding environment and the issues currently faced including some of the key concerns that have arisen in respect of disclosure and conflicts of interest, privilege, and, costs and security for costs. The report also provides commentary on principles of best practice in third party funding arrangements; this commentary aims at “providing further guidance in the form of articulation of what constitutes good and responsible practices in entering a funding arrangement”[24].

Going forward, the report when published will aim to encourage the parties to an Arbitration to adopt the principles advanced in the report to their proceedings. Further, and perhaps more likely, parties, legal counsel and arbitrators may reference or invoke the principles to address issues that arise in the course of arbitration, in entering into a funding agreement, and in discussions regarding third party funding[25]. Also, national courts reviewing international arbitral awards or addressing issues relating to third party funding could find the report useful[26].

Comparing Hong Kong Code of Practice for Third Party Funding Arbitration with the Code of Conduct in England & Wales

Application

The HK Code applies to:

• all Hong Kong seated arbitrations and
• any arbitration conducted outside Hong Kong to the extent that the costs and expenses of services in relation to the arbitration are provided in Hong Kong[27]

that have a written funding agreement (made on or after the commencement date) entered into between a funded party and a funder.[28] Both Hong Kong and overseas parties should be aware of the provisions within the HK Code when entering into arbitration funding agreements.

Compliance

The provisions of the HK Code are binding on all parties and “applies to any funding agreement”.[29] Failure to comply with the HK Code does not render any person liable to any judicial or other proceedings.[30] Any non-compliance would only be used as evidence in subsequent court or tribunal proceedings.[31]

By contrast, the EW Code represents the leading practice in England and Wales but is only to be followed by members of the Association of Litigation Funders. As such, compliance with the EW Code is not mandatory.

Control

One of the concerns for regulators and funded parties is the level of control that a funder exerts over a dispute. There is a perceived risk that the funder may seek to influence and take over proceedings to the funded party’s detriment.

The HK Code requires a funded agreement to set out clearly that the third party funder will not seek to influence the funded party or the funded party’s legal representative to give control or conduct of the arbitration to the third party funder.[32]

The EW Code states that a funder may provide input to the funded party’s decision in relation to settlements,[33] but at the same time, should not seek to influence the funded party’s legal counsel to cede control or conduct of the dispute.[34]

On its face, the HK Code appears to provide more protection for the funded party than the EW Code. However, the rule is followed by the exception of: “except to the extent permitted by law.” This statement is ambiguous as there are no examples or explanation to illustrate the extent of control a funder can have. Neither the HK Code nor the Ordinance set out what controls a funder is permitted to have under the law. It remains to be seen whether the HK Code can adequately protect a funded party’s interest.

Conflict of interest

The HK Code requires a funder to maintain effective procedures for managing any conflicts of interest[35] and further lists out examples of effective procedure.[36] In doing so, the HK Code states that “the third party funder has effective procedures for managing a conflict of interest…if it can show through documentation that… [Lists out examples effective procedure]”. The use of the word “if” is potentially problematic as it is unclear whether effective procedures can be shown through other means that are not listed in Paragraph 2.7 of the HK Code. The EW Code does not address the issue of conflicts of interest.

In this respect, the HK Code has scrutinized the EW Code and addressed the issues that arose in other jurisdictions. The codification of effective procedures to control the conflict of interest between parties is a welcome addition in safeguarding a funded party's interest.

Disclosure

The HK Code requires a funded party to disclose in writing the existence of the funding agreement and the name of the third party funder to each other party to the arbitration and the arbitration body.[37] In addition, the third party funder has a duty to remind the funded party of its duty to disclose.[38] The Ordinance also clarifies that parties can communicate information relating to the arbitral proceedings to a third person to have, or seek, third party funding of arbitration from the person.

The EW Code is silent on the parties’ disclosure obligations. The inclusion of a disclosure requirement in the HK Code provides a clarity that the EW Code does not.

Emerging Issues

In its recent years of development, TPF has been engulfed by diverse issues. Presently, the “restrictive nature of applicable laws (including the definition of ‘party’ and ‘costs’) and the exceptionally exercised jurisdictional powers of tribunals on third parties (except traditional principles of agency and assignment) result in a shortfall of arbitral practice vis-à-vis third-party funders”.[39] Interestingly, while the majority of applicable laws state that the award shall be binding between parties, the English Arbitration Act 1996 also includes within the ambit of 'party'— "persons claiming under or through them". This could be interpreted to include funders. However, courts have accorded a narrow interpretation of the term 'party' to only include parties by way of principles of agency and subrogation. Unless arbitral practice establishes, or applicable laws evolve, to expressly include funders in costs orders, this power remains largely subject to discretion and application of third-party principles, keeping alive the pervasive foundation of arbitration, that is, party consent. While it will be quintessential to consider the roots of consensual dispute resolution, arbitral practice beckons wider purview to encompass third party funders in certain circumstances to meet the interests of justice and equity.

Conclusion

Third Party Funding is a fast-growing industry and will undoubtedly play a vital role in international commercial arbitration in the future by becoming a commonplace financing method for international arbitration disputes. While the market is still relatively small regarding the number of providers and available capital, there are relevant funds available for arbitrations, and they are currently being invested in cases that are considered to be strong and to have good recoverability prospects. Because of the need for transparency in investment arbitration, TPF will arguably play an even bigger role in investment arbitration. TPF is a tremendous way to outsource the financial risks connected with arbitral procedures. However, TPF also implies giving up some of the control to the funder.

The main problem caused by TPF agreements is that they are disconnected from the main disputes, both in the sense of applicable law and jurisdiction of the tribunal. This also explains why tribunals have been reluctant to consider the relevance of a funding agreement on the question of the allocation of costs. Despite the absence of a general obligation to disclose TPF agreements, the need to maintain the impartiality and independence of arbitrators, which is generally considered to be a fundamental principle of arbitral procedure, may require to disclose of TPF agreements.

In India, TPF would be a step towards achieving public policy objectives, by inter alia increasing access to justice, ensuring effective representation and improving case management. However, the lack of a regulatory framework and definitive legal certainty has prevented funders from making an entry into the Indian market. In light of the recent legislative amendments in Singapore and Hong Kong, it is high time that India takes advantage of its historical rejection of champerty and maintenance to compete effectively in the international arbitration landscape by developing into a hub for international commercial arbitration. Hence, it will be interesting to note the final decision of the Hyderabad High Court viz. third-party funding agreements.

Third-party funding certainly possesses the potential to assume a position of significance in the context of international commercial and investment arbitrations. Although much discourse around this topic has circulated within academic circles, positive steps by jurisdictions around the world to legislate on the matter will make third-party funding commonplace sooner. The success of allowing such interventions in alternate methods of dispute resolution would pave way for third-party funding in traditional modes like litigation. Therefore, the time is ripe for India to unequivocally pave way for third-party funding, a measure that is certain to benefit its citizens as well as India’s reputation globally.

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