Beginner’s Guide: Understanding the Concept of Third-Party Funding.
By Fathia Adetola.
Introduction
International arbitration emerged due to the inadequacy of several states’ arbitration laws in meeting the needs of transacting parties, offering a neutral platform for dispute resolution in the realm of international transactions. Its evolution as an independent legal framework stands out as a remarkable narrative of institution-building on a global scale throughout the past century. A game-changer in enforcing international arbitration was the introduction of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1958.[1]This agreement, ratified by over 150 countries, was a significant move toward establishing a consistent and acknowledged international arbitration process.[2]
Third-party funding (herein referred to as “TPF”)[3] is an integral part of the landscape of international arbitration which, refer to, at its core, any practice through which a non-party funds a party’s litigation.[4] The International Chamber of Commerce (herein referred to as “ICC”) refers to it as “an arrangement for the funding of claims or defence and under which [a non-party] has an economic interest in the outcome of the arbitration. [5]
Essentially, TPF is a significant concept in arbitration as it is designed to support parties to an arbitration who do not have the mean to pursue claims or defence to get funding for the part or all of the cost of the proceedings in form of a donation, grant or in return for a remuneration dependent on the outcome of the dispute.[6] TPF agreements usually are premised on the “no cure, no pay” principle, meaning that the funder is compensated only if the dispute is resolved in favour of the funded party. In the event of an unfavourable outcome for the funded party, the funder is not entitled to recover the amounts invested.
Several leading arbitral centres such as International Centre for Settlement of Investment Disputes (“ICSID”), the International Court of Arbitration of the International Chamber of Commerce (“ICC”), the Madrid International Arbitration Center (“MIAC”), or the Singapore International Arbitration Centre (“SIAC”) have amended their rules to include TPF. This has led to the rapid expansion of the TPF industry, with third party funders such as Burford Capital, Juridical, Fulbrook Capital, Woodsford Litigation Funding, Omni Bridgeway, DS Legal Capital.[7]
Why Third-Party Funding?
According to a former chief judge of Oyo State, the journey of a case from a state high court in Nigeria to the Supreme Court takes approximately 22 years. While arbitral processes are generally perceived as quicker than litigation, the actual time frame is not always significantly shorter. The critical consideration, however, is the associated cost. Contrary to the common belief that arbitration is a faster and more cost-effective alternative, it is not universally true. Research suggests that arbitration costs can be comparable to or even exceed those of litigation.
This raises the question of whether individuals or entities lacking substantial financial resources can pursue arbitration, even when it is in their best interests. The answer is nuanced. Despite the potential financial burden, there is a solution in the form of third-party funding. This concept involves a third party, separate from the disputing parties, providing financial support to one of them. Thus, individuals or entities without significant financial means can still access arbitration, ensuring that justice is pursued efficiently, even when it requires external financial assistance.
Third Party Funding in Nigeria
The common law doctrines of champerty and maintenance traditionally pose potential legal challenges to the involvement of third-party funders in dispute resolution proceedings, making the enforcement of third-party funding (TPF) difficult in jurisdictions adhering to common law principles. However, a notable departure from this norm occurs with the enactment of the Arbitration and Mediation Act 2023 herein (referred to as “the Act”). Section 61 of the Act explicitly exempts third-party funding of arbitration from the constraints of champerty and maintenance, thereby officially recognizing and legitimizing the concept of third-party funding within the jurisdiction.
Furthermore, the Act, in Section 91, provides a comprehensive definition of a TPF agreement, characterizing it as a contractual arrangement between the third-party funder and a disputing party, an affiliate of the party, or the law firm representing the party. This agreement serves the purpose of financing either a portion or the entirety of the proceedings’ costs, whether individually or as part of a selected range of cases. The financing can be extended through various means, including donations, grants, reimbursement contingent on the dispute’s outcome, or premium payments.
Essentially, a TPF agreement, like any typical commercial contract, comprises the essential elements that render it legally binding. The existence of offer and acceptance is integral, originating from either the third-party funder or the disputing party and accepted by the other party. Consideration, executed to a reasonable extent, is involved, with the third-party funder providing financial support while the disputing party’s commitment is typically executory, as the agreement entails repayment with agreed-upon interests upon a favorable dispute resolution outcome. Both parties possess the legal capacity to enter into such agreements, and their mutual intention to be legally bound is evidenced through written agreements, signed by both parties.
A third party funding agreement involves two key participants: the third-party funder and the funded party. As defined in Section 91 of the Act, a “Third-Party Funder” is a person or entity external to the dispute who enters into an agreement to finance part or all of the proceedings’ costs. The funded party, is typically a claimant in an ongoing dispute who requires financial support from the third-party funder to effectively pursue their case.
In the initial stages, discussions occur between the disputing party and the potential third-party funder. Once a the disputing party (potential claimant) submits a matter for a funder’s consideration, the funder will conduct a due diligence on the dispute. This exercise considers factors such as the likelihood of success, the monetary value of the claim, estimated costs to complete the claim, terms of the arbitration agreement, the arbitration’s seat, and the respondent’s ability to meet the arbitral award.[8]
Generally, expenses covered by TPF agreements include the fees of lawyers, experts and arbitrators; costs of the arbitral institution; expenses relating to the proceedings (e.g., translations, platforms for handling and filing documents, transfers); and possible awards of costs in favour of the opposing party however, parties must reach an agreement on the extent of costs covered by the funding arrangement.[9] In practice, TPF agreements include a budget with estimates for these items.[10]
Disclosure of Third Party Funding
Third-party funding in arbitration proceedings involves the financial backing of a party by an external entity, and the question of whether such arrangements should be disclosed remains a debated topic. Various arbitration rules and regulations approach this issue differently:
- ICC Rules 2021 (Article 11(7)):
- Mandates prompt disclosure by each party of any non-party funding arrangement.
- Requires informing the Secretariat, arbitral tribunal, and other parties about the identity of the third party.
- SIAC Investment Arbitration Rules (2017):
- Empowers the tribunal to order disclosure of the third-party funding arrangement.
- Allows revealing the identity of the third-party funder, details of their interest, and their agreement on adverse costs.
- HKIAC Rules (2018):
- Explicitly addresses third-party funding at Article 44.
- Demands the funded party to communicate a notice to all parties and the tribunal about the funding agreement.
- Grants the tribunal the authority to consider funding arrangements in determining arbitration costs.
- Arbitration and Mediation Act 2023 of Nigeria (Section 62)
- Requires the funded party to promptly disclose third-party funding to the opposing party, tribunal, and relevant arbitral institution.
- The disclosure, including the Third-Party Funder’s details, is obligatory upon finalizing the funding agreement.
- LCIA Rules 2020:
Remains silent on third-party funding disclosure.
- Asian International Arbitration Centre (2021 Rules): Does not mandate disclosure but grants the tribunal power to inquire about third-party funding arrangements and direct parties to disclose such arrangements throughout the proceedings.
In contrast to some institutions’ explicit requirements, the LCIA Rules and the Asian International Arbitration Center’s approach appears more discretionary regarding the disclosure of third-party funding in arbitration.[11]
What Are the Risks and Challenges Associated with Third-Party Funding?
Third-party funding offers two major benefits – facilitating access to justice for under-resourced parties in legal disputes and provision of financially secure parties with a more flexible financing structure. Despite these benefits, concerns and risks exist, necessitating careful consideration and thorough risk preparation when deciding on funding.[12] Here are some risks and challenges involved-
- Unaddressed Regulatory Gaps: The existing regulatory and policy frameworks, although improved, lack clarity on crucial aspects of third-party funding (TPF) agreements, leaving key questions unanswered. These gaps include uncertainties about the role of the funder, the funder’s influence over procedural actions, and the lack of guidelines on critical matters.[13]
- Alignment of Interests: The issue of conflicting interests between the funder and the funded party in situations where decisions, such as settling a dispute on less favorable terms, need to be made. The absence of a clear directive on whose interests should prevail in such scenarios adds a layer of complexity to TPF agreements.[14]
- Legal Obligations of Funded Party’s Lawyers: The uncertainties extend to the legal profession, with questions arising about the obligations of lawyers representing the funded party towards the funder.[15]
- Challenges regarding confidentiality and disclosure as well as conflicts of interest: According to Omoaka et al, concerns arise with third-party funding, including confidentiality and disclosure issues (such as information exchange between the claimant and funder) and conflicts of interest (balancing funder and claimant interests during arbitration).[16] Varying privilege rules and arbitration confidentiality approaches across jurisdictions further complicate matters. Before engaging with third-party funders, it’s crucial to assess these issues under applicable laws to avoid potential disclosure of confidential or privileged communications. In Nigeria, while the Act allows third-party funding, unregulated proceedings pose a challenge. Detailed provisions in the new enacted Act could have addressed confidentiality and conflict of interest concerns in Nigerian arbitration.
Conclusion
As we have explored, TPF plays a pivotal role in leveling the playing field by providing financial support to parties who may lack the means to pursue arbitration, ensuring that justice is not compromised by financial constraints. The Arbitration and Mediation Act 2023 in Nigeria marks a significant step in acknowledging and legitimizing TPF within the jurisdiction. By exempting third-party funding of arbitration from traditional legal constraints, such as champerty and maintenance, the Act paves the way for a more inclusive and accessible dispute resolution process.
However, the benefits of TPF are not without their challenges. Regulatory gaps, potential conflicts of interest, and uncertainties in legal obligations raise pertinent questions that require careful consideration. The Act addresses the disclosure aspect, underscoring the importance of transparency in TPF agreements, but ongoing discussions and refinements are essential to create a robust framework. Moreover, the risks associated with TPF, including concerns about confidentiality, disclosure, and conflicts of interest, emphasize the need for a nuanced approach. As the TPF industry expands globally, it is imperative for jurisdictions to continually refine and adapt their legal frameworks to strike a balance between promoting access to justice and safeguarding the integrity of the arbitration process.
Simply put, a comprehensive understanding of TPF is crucial for all stakeholders involved in international arbitration. As the landscape continues to evolve, practitioners, arbitrators, and policymakers must collaboratively address challenges, enhance regulations, and foster an environment where TPF can fulfill its intended purpose – facilitating access to justice and contributing to the efficacy of international dispute resolution.
Endnotes
[1] Also known as the “New York Convention.”
[2] Okoko D, ‘Building a Career in International Arbitration; Accreditation, Training and Specialization’ (Mondaq.com29 March 2022) <https://www.mondaq.com/nigeria/arbitration–dispute-resolution/1177100/building-a-career-in-international-arbitration-accreditation-training-and-specialization> accessed 20 December 2023.
[3] Also referred to as “legal finance or litigation finance.”
[4] Black’s Law Dictionary
[5] Dalal Alhouti, ‘Disclosing Third-Party Funding in International Arbitration: Where Are We Now?’ (CRS29 November 2022) <https://www.charlesrussellspeechlys.com/en/insights/expert-insights/litigation–dispute-resolution/2022/disclosure-obligations-and-third-party-funding/#:~:text=The%20ICC%20also%20adopts%20a,or%20conditions%20of%20the%20arrangement.> accessed 20 December 2023
[6] Ibid
[7] Gilbert S, ‘Third-Party Funding of Arbitration in Nigeria; Prospects, Challenges and Lessons from Singapore and Hong Kong’ (Ssrn.com5 November 2022) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4269288> accessed 20 December 2023
[8] Shasore O and Fciarb S, ‘ARBITRATION: THIRD PARTY FUNDING NEW FRONTIERS in DISPUTE RESOLUTION in NIGERIA’ <https://www.alp.company/sites/default/files/ARBITRATION%20-THIRD%20PARTY%20FUNDING%20%20..pdf> accessed 20 December 2023
[9] Ibid
[10] J. von Goeler, “The Various Forms of Third-Party Funding in International Arbitration” in “Third-Party Funding in International Arbitration and its Impact on Procedure,” International Arbitration Law Library vol. 35 (Kluwer Law International 2016), p. 19
[11] (as per Article 13.5(e)).
[12] ‘The Third-Party Funding Debate – We Look at the Risks | Global Law Firm | Norton Rose Fulbright’ (Nortonrosefulbright.com2016) <https://www.nortonrosefulbright.com/zh-hk/knowledge/publications/6c843d32/the-third-party-funding-debate-we-look-at-the-risks#:~:text=Third%2Dparty%20funding%20arrangements%20may,the%20funder%20and%20an%20arbitrator.> accessed 20 December 2023
[13] Ibid
[14] Nazar F and Cañete C, ‘Third-Party Funding: Practical Considerations and Challenges’ (2023) <https://www.perezllorca.com/wp-content/uploads/2023/10/Legal-Briefing-Third-Party-Funding-Practical-Considerations-and-Challenges.pdf> accessed 20 December 2023
[15] Ibid
[16] Ibid
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