Draft Report of the International Council for Commercial Arbitration on Third-Party Funding: What You Need Know

The Draft Report of the International Council for Commercial Arbitration and the Queen Mary University of London Task Force on Third-Party Funding in International Arbitration:  What You Need to Know

The international arbitration community has been a leader in the adoption and evolution of third-party funding.  Continuing that trend, The International Council for Commercial Arbitration (“ICCA”) partnered with Queen Mary University of London (“QMUL”) in 2013 to establish a task force comprised of over 50 leading international arbitration experts (the “Task Force”) to “identify and study the issues that arise in relation to third-party funding in international arbitration, and to determine what outputs, if any, would be appropriate to address them.”

The Task Force’s work resulted in the Draft Report for Public Discussion on Third-Party Funding in International Arbitration, published on September 1, 2017 and subject to a public comment period.  The Draft Report, in addition to providing a detailed background on the market, scope and mechanics of dispute funding (see Chapter 2), identifies key issues that “(1) directly affect international arbitration proceedings; and (2) are capable of being addressed at an international level.”  For each issue identified, the Draft Report analyzes the competing viewpoints, and proposes a set of principles (the “Principles”).

The Task Force, which will meet again in November to discuss finalizing the report ahead of its release at the ICCA Congress in Sydney in April 2018, intends that the final Report will be used as persuasive guidance to parties, counsel, arbitrators and perhaps national courts to address issues that arise during the course of an arbitration.  The following summarizes the key issues and recommendations in the Draft Report.

Definition of Third-Party Funder (Chapter 3):  The Report proposes a general working definition for third-party funder:

The term “third-party funder refers to any natural or legal person who is not a party to the dispute but who enters into an agreement either with a disputing party, an affiliate of that party, or a law firm representing that party:

1. in order to provide material support or to finance part or all of the cost of the proceedings, either individually or as part of a selected range of cases, and
2. such support or financing is provided either through a donation or grant or in return for remuneration or reimbursement wholly or partially dependent on the outcome of the dispute.

The Task Force intentionally chose a broad definition to include commercial third-party funders, law firms providing contingency fee funding, not-for-profit funders, and to apply to funding for both claimants and respondents and single-case and portfolio funding arrangements.

Disclosure and Conflicts of Interest (Chapter 4):  The Task Force concluded that the potential for arbitrator conflict of interests is of sufficient concern to justify a disclosure rule.  These conflicts include (i) arbitrators may be affiliated with law firms that have either a close relationship with a funder or a matter funded by  a third-party funder; (ii) arbitrators may serve as consultants to funders; or (iii) arbitrators may have other financial/personal interest in the funders.  The Task Force also recognized the counter-risk of a disclosure rule, which is that excessive disclosure may lead to frivolous challenges to arbitrators and/or other satellite disputes related to the funder.  The Draft Report thus put forth two alternative principles.  The first calls for a party to disclose “the existence of a third-party funding arrangement and the identity of the funder” either at the party’s first appearance or submissions or as soon as practicable after funding is provided.  The second alternative would not mandate disclosure in every case, but give the arbitrator and the arbitral institutions the authority to request during the selection and appointment process that the parties disclose the existence and identify of the funder.  Neither alternative would require or authorize disclosure of additional information, e.g., the terms of an agreement with a third-party funder.

Privilege (Chapter 5):  While the Principles provide that the existence of funding and identity of a third-party funder are not privileged information, the Principles recognize that specific provisions of funding agreements may be privileged information (and should not be ordered disclosed except in exceptional circumstances) and that providing other privileged information to a third-party funder does not waive the privilege.

Costs and Security for Costs (Chapter 6):  This final set of Principles relates to several of the “hottest” topics related to third-party funding and international arbitration, particularly (i) whether/when the costs of third-party funding are recoverable against the opposing party as part of a successful costs award; (ii) whether/when the tribunal has jurisdiction to issue an order for costs against a third-party funder; and (iii) how the existence of a funder plays into an opposing party’s right and ability to seek security for costs.

As to the issue of recovering the costs of funding, the Principles provide that except in “exceptional circumstances,” the amounts owed or paid to a third-party funder are ordinarily not recoverable as costs.  This recognition that, at least in exceptional circumstances, an adverse cost award could include the costs of the funder is relatively innovative, and finds its roots in a matter we discussed last year, in which the UK High Court affirmed a cost award from an ICC arbitration that included the amounts the funded party owed to the funder on the theory that the funded party was forced to seek funding as a result of the respondent’s wrongful conduct, which drove it into financial straits.  The Principles do not explain what constitutes “Exceptional Circumstances,” but we imagine that something akin to the egregious conduct and resulting financial distress found in the UK case will be required for the exception to apply.

In the opposite situation, where the funded party has not prevailed, there has been a debate over whether the third-party funder should or could be held liable for costs.   Ultimately, the Draft Report concludes that irrespective of the policy considerations, the fundamental principle of consent to jurisdiction of the arbitral body overrides and in general, a tribunal lacks jurisdiction to issue costs order against a third-party funder.

Finally, the Task Force considered how to weigh third-party funding arrangements in the context of an application for security for costs.  The Principles propose that an application for security for costs should be determined irrespective of any funding arrangement and on the basis of impecuniousness.   The moving party will have the burden to make a prima facie case of impecuniousness before the opposite party will have to defend the application.  Only then will the tribunal consider, among other factors, the fact and nature of third-party funding arrangements (including ATE insurance) before ordering security for costs.

Other Information in the Report:  The Report also includes a set of Best Practices related to the funding agreement and funding relationship (Chapter 7, Part B), which practitioners may find useful. The Report ends with a discussion (but no recommendations) in Chapter 8 of the unique policy and technical considerations related to investment arbitration.

If you would like more information the ICCA-QMUL Report or third-party funding in international arbitration generally, please contact us.   Additional resources are also available at http://third-party-funding.org/, an online repository and research resource established to systematically study and keep track of the rapid developments of third-party funding in international arbitration.