SPOTLIGHT #6 Third-Party Funders in Arbitration: And justice for all
At Lead up, we are committed to providing our clients with the most innovative dispute resolution solutions to fit their specific industry contexts. To do that, we have to stay on top of the recent developments in our clients’ sectors, and analyse these developments in line with our clients’ needs. Every month, in “Lead up Spotlight”, we share with you – our colleagues, clients and prospective partners – our analysis on a recent development relating to dispute resolution in an industry that matters to us and to our clients. This month’s Lead up Spotlight, however, is a bit different. We do not address a recent development in dispute resolution, rather we give an overview of a topic relevant to all potential arbitration parties, but somewhat still overlooked, third-party funding.
Engaging in international arbitration can be expensive, especially in complex disputes. But, with the assistance of experienced legal counsel, this financial burden can sometimes be surpassed via third-party funders (TPFs), entities that provide the financial resources needed to pursue or defend a claim in exchange for an agreed return. Typically, TPFs achieve return of their investment by either collecting an agreed percentage of the proceeds of the arbitration or collecting a multiple of their investment. Either way, TPFs are only paid if the funded claim is successful.
The Function of Third-Party Funders
Third-party funders typically cover the costs of the arbitral proceeding as well as the legal expenses associated with arbitration, such as attorneys’ fees, expert witness fees, and their related expenses. This financial support enables parties who might otherwise be unable to afford arbitration to pursue legitimate claims, or, more rarely, defend against unmeritorious claims. TPFs assume the arbitration risk, only receiving a return on their investment if the funded party wins or settles favourably.
Advantages of Third-Party Funding
1. Access to Justice: TPFs provide parties with limited financial resources the means to pursue or defend claims, thereby enhancing access to justice. This is especially beneficial for smaller entities engaged in disputes with larger, well-funded opponents.
2. Risk Management: For businesses, third-party funding can help manage financial risk. By transferring the costs and risks of arbitration to a third party, companies can preserve their capital for operational needs while still pursuing or defending legal claims.
3. Expertise and Support: TPFs often bring valuable expertise to the table, providing strategic insights and support throughout the arbitration process. Their experience in assessing the merits of cases and their understanding of arbitration dynamics can be advantageous to the funded party. Some TPFs adopt a light touch approach once they have agreed to fund the case, while others can stay involved in strategic discussions throughout the case.
4. Strategic Advantage: TPFs can also help the funded party to reach an amicable settlement. The fact that a funder is willing to back the funded party indicates to the opposing party that the TPF has reviewed the funded party’s case and deemed it likely to succeed, suggesting that the investment is expected to yield a favourable return.
Reaching a Funding Agreement
Before reaching a funding agreement, a process involving two main phases should be enacted:
1. Preparing the File and Due Diligence: Parties seeking fund must prepare a file comprising information about the parties to the dispute, the potential jurisdictional and admissibility challenges (if any), the factual and legal aspects of the case, the amount of sought damages, the chances and planned strategy to enforce issued awards, any settlement strategy and the expected budget and timeline. This file allows TPFs to undertake their due diligence to assess the case and its associated risks.
2. Concluding the Funding Agreement: If the outcome of the due diligence is satisfactory to the funder, the funder and the party seeking the fund negotiate to reach mutually agreeable terms. While funding agreements differ from case to case, they commonly include provisions regarding the financial arrangements, conditions for terminating the agreement, matters of confidentiality and privilege, settlement terms, and legal counsel involvement.
Regulatory Environment
The regulation of third-party funding in arbitration varies worldwide. Some jurisdictions have welcomed it for its benefits, while others have imposed restrictions to prevent potential misuse. The International Bar Association (IBA) and other professional bodies have issued guidelines to address the ethical and procedural issues related to third-party funding. For instance, the IBA Guidelines on Conflicts of Interest in International Arbitration of 2024 include provisions on disclosing third-party funding arrangements.
Conclusion
Third-party funders are becoming an integral part of the arbitration landscape. They not only provide critical funding but also promote access to justice, allowing parties to pursue or defend claims that might otherwise be financially out of reach. In practice, securing third-party funding is achievable with proper assistance from legal counsel.