First published on Lexis®PSL Arbitration on 10th October 2017
Arbitration analysis: Following the publication of the International Council for Commercial Arbitration (ICCA) and Queen Mary University of London Task Force’s ‘Draft Report on Third-Party Funding in International Arbitration’, Robert Rothkopf, managing partner and founder of Balance Legal Capital, outlines the issues surrounding third-party funding from a funder’s perspective and explains why he believes the report to be a helpful review, albeit somewhat limited in scope.
Third-party funding draft report now available online for public comment, LNB News 04/09/2017 27.
Third-party funding remains in the spotlight in international arbitration and will come under renewed scrutiny following publication of the draft report of the task force established in 2013 jointly by ICCA and Queen Mary University of London. The report is available for public comment until 31 October 2017.
Investment treaty arbitrations cross our desks more frequently than commercial arbitrations, but we’re seeing increased demand for commercial arbitration funding and an exciting boost in Singapore and Hong Kong-seated arbitrations since those markets opened up this year. Most frequently we are asked to fund the fees of the arbitration, but occasionally a claimant may already have a law firm acting on a contingent fee and be seeking to further monetise their award.
We see some meritorious cases but occasionally, in our view, the damages figure claimed appears inflated and, once adjusted, makes the claim uneconomic. Another surprising hurdle in relation to investment treaty arbitration has been the reluctance by claimants to expressly warrant in the funding agreement that there was no corruption (by them or their agents) in relation to the procurement of their investment at the heart of the dispute. Sometimes even their law firm representatives are squeamish about us asking the question. Naturally, this is more than enough to make alarm bells ring and for us to walk away from the opportunity.
Most law firms now accept that their knowledge of the funding market is a key part of their offering to clients, who want to know about their finance options when embarking on an expensive and uncertain arbitration. It is no longer restricted to boutique and mid-market law firms, but those at the top end, too.
There is some mystique at the moment around ‘portfolio-funding’ which simply describes dispute finance cross-collateralised in a number of cases held by the same claimant, or being conducted by a law firm on a damages-based or conditional fee basis. With risk spread across a portfolio, the pricing can be lower than single-case finance models. However, the reality is that most claimants and law firms do not have a ready-made portfolio of cases, and funders still require the ability to approve what goes in. Single case opportunities therefore remain the most common part of our deal flow.
For the most part, we regard the task force’s draft report to be a pragmatic and helpful review of the issues, real or perceived, that arise in the context of arbitration funding.
In relation to the principles, we have the following comments:
PRINCIPLES REGARDING DISCLOSURE AND CONFLICTS OF INTEREST
The last thing we want as funders of arbitration is a challenge to the arbitral award due to actual or potential arbitrator bias. We agree that this has to be the overriding interest and acknowledge that as part of an arbitrator’s duty to investigate conflicts, the question of whether a party has third-party funding is relevant. This is an inevitable feature of the arbitration system. However, two issues with this principle arise.
Firstly, it is almost impossible to agree on an appropriate definition of ‘third-party funder’. The task force noted definitional difficulty considering the artificial functional or economic distinctions made as to the interests in arbitration claims that insurers, debt or equity holders, related companies, and contingent fee law firms may have. The report makes no mention of funding brokers in this context, who usually retain a right to a share of the funder’s contingent premium. It would be unfair to single out one group that has an interest in the outcome of a claim based on these artificial distinctions, but then again, it is in no one’s interests for the net to be cast too wide.
Secondly, more disclosure tends to lead to more opportunity for expensive delay as tenuous links can be used as a basis to challenge arbitrator impartiality, or form the basis for security for costs applications or other fishing expeditions. More expense and delay does not serve the interests of justice. We would like to see arbitral institutions develop rules and practices to minimise costs and delay in this regard.
PRINCIPLES REGARDING PRIVILEGE
The task force rooted its principle regarding privilege in the approach espoused by the International Bar Association’s Rules on Taking of Evidence which we believe provides a sensible and widely accepted framework. We agree that tribunals and courts must respect the legitimate expectations of parties who, in approaching funders, do so in order to recruit support and investment for their dispute and do not consent to waive their privileged information as against the whole world when furnishing information to a funder, but merely provide a limited waiver to the funder. We ensure all information is exchanged pursuant to a non-disclosure agreement containing a common interest privilege agreement, and a limited waiver agreement. Any tribunal or court decision that seeks to undermine the limited waiver approach would hamper the interests of justice and chill the funding market, so we are pleased to see that the task force seeks to uphold this standard.
PRINCIPLES REGARDING COSTS AND SECURITY FOR COSTS
Often the justification for making a funder liable for adverse costs is premised on the idea that if funders stand to gain in the financial upside of a successful claim, they should also take the downside risk of adverse costs. This idea implies a degree of equality between the funder and the funded party that is not real. The funder is not in the shoes of the funded party—it does not have the same knowledge of the facts or the documents that will determine the dispute, despite the funder’s best efforts through due diligence, it does not have the same degree of control over the conduct of the dispute. In investment treaty arbitration, only the claimant will know whether its mistreated investment was procured through corruption, and yet a funder is expected to shoulder the risk which could have a binary and devastating impact on the success of the case (see, for example, Churchill Mining PLC and Planet Mining Pty Ltd v Republic of Indonesia (ICSID Case No ARB/12/14 and 12/40) and Spentex Netherlands, B.V. v Republic of Uzbekistan (ICSID Case No ARB/13/26)).
Nor is a funder ‘off risk’ when a funded claimant wins, in Waguih Elie George Siag and Clorinda Vecchi v The Arab Republic of Egypt (ICSID Case No ARB/05/15), for example, Siag attempted to avoid the success fee due to King & Spalding by cutting a side-deal with Egypt. Luckily Siag had property in the EU against which King & Spalding could obtain redress. Shifting the risk of adverse costs entirely onto the funder should therefore be tempered.
In regard to security for costs, we’re pleased to see that the task force’s report provides a thorough and pragmatic examination of the issues in this area, upholding the high bar that should prevail in security for costs applications, and noting that the mere use of third-party funding does not indicate bad faith or abuse and that the existence of a funding agreement is not sufficient to satisfy a security for costs application. Indeed, the presence of a funder can indicate strength in the merits of the claimant’s case. It is also a useful reminder for practitioners as to the different standards that have emerged in investment treaty arbitration and commercial arbitration, where there is a tendency in some discussions on the conference circuit to conflate the two. The ‘material change of circumstances’ test in commercial arbitration cannot be met merely by a claimant taking on third-party funding.
We would also add that because such a practice is becoming increasingly mainstream, it should fall well within the scope of commercial foreseeability at the time the arbitration agreement was executed. We are pleased to see that the task force calls out the transparency of respondents in using funding to justify an ‘impecuniousness assumption’ which merely increases delay and costs, and does not bear scrutiny given that well-capitalised claimants are also users of third-party funding. We welcome the reminder that an after the event policy should be adequate security for costs, and the principle that the costs of posting security by a funded party should be borne by a respondent if the claimant prevails on the merits.
We think that para 1 of the security for costs principles should first reiterate that applications for security for costs should be determined according to the usual principles that do not concern impecuniousness of a party and recognise the high hurdle for such applications. By focussing the problem on the impecuniousness of the claimant, it risks giving the impression that this is the only valid consideration.
The task force has done a good job but has inevitably had to limit its scope. Some nuances which arise in practice have been missed.
The report naturally focuses on third-party funders, but seems to demote the important roles of the lawyers, the claimants and the brokers. There was no scrutiny of broker pricing or how their involvement can influence the dynamic. There are some brokers out there who we think serve the market well, and others who are an active hindrance to the claimant and lawyers’ interests, adding delay, expense and Chinese whispers to the process. We have also seen instances where law firms are keen to back cases where we see no merit at all, merely to build a credential. It should be recalled that it takes many parties to bring a frivolous case and that it is likely that funders are in fact the most on guard to prevent this.
Interviewed by Jenny Rayner.