third party funding: what role for arbitral … · after the third party funding for arbitration...

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VANNIN CAPITALTHIRD PARTY FUNDING: WHAT ROLE FOR ARBITRAL INSTITUTIONS?

THIRD PARTY FUNDING: WHAT ROLE FOR ARBITRAL INSTITUTIONS?

We are grateful to the following institutions for their participation:

Arbitral institutions play a critical role in the resolution of disputes. In addition to providing rules by which parties may conduct the arbitration process, institutions provide a panoply of other services: guidance on the selection of arbitrators, advice on how to reduce time and costs, management of the financial aspects of the arbitration, training and education. As third party funding has grown in acceptance and use in international arbitration, the question arises as to what role institutions can and should play in regulating the practice or assisting parties who may be seeking funding. We decided to ask the arbitral institutions directly, by way of a survey, how they view their role in the third party funding process.

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Our survey revealed that arbitral institutions are actively grappling with issues arising out of the growth in use of third party funding. Some institutions have adopted a “wait and see” approach, others are providing active guidance to parties, and several institutions are adopting formal changes to their rules to regulate aspects of the use of third party funding.

In this article, we first set out the current landscape of arbitral institutions and third party funding, including a review of guidance notes from institutions and an examination of proposed or recently-adopted changes to arbitration rules (I).

We then examine the areas of consensus and controversy on the appropriate role for arbitral institutions with respect to third party funding, from disclosure to rules on the allocation of costs (II). Finally, we offer concluding thoughts on the role for arbitral institutions with respect to the use of alternative funding arrangements by parties using their services (III).

I. Current landscape

Our survey asked arbitral institutions for their views on the frequency of use of third party funding by parties using their rules. The results on this point are clear: parties are increasingly using alternative funding arrangements, but the institutions are not necessarily aware of the details.

We also asked if and how arbitral institutions have changed their practices or rules in response to third party funding. The responses show that arbitral institutions have taken varying approaches to parties’ use of alternative funding for arbitration cases.

Given the growth of third party funding, one can imagine this issue becoming a differentiator between institutions and a factor for parties when selecting the services of one arbitral institution over another.

THE GROWTH OF THIRD PARTY FUNDING WILL BECOME A DIFFERENTIATOR BETWEEN ARBITRAL INSTITUTIONS.

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1. Growth in third party funding

Third party funding (“TPF”) remains a relatively new innovation in international arbitration, but one that has seen significant growth. In the next five years, various global and regional arbitral institutions expect to see (i) third party funding being used both by claimants and respondents, and (ii) a variety of approaches to both the financing of arbitration proceedings.

As noted by the International Centre for the Settlement of Investment Disputes (“ICSID”), “TPF has been available for litigation in many domestic jurisdictions for quite a while, but we have seen an increase in such funding in international arbitration, including in Investor-State Dispute Settlement (ISDS), in the last 5 years”.

In Spain, the Madrid Court of Arbitration (“MCA”) has “seen an increased presence of third party funding over the last years, clients and counsel seem to be more aware of this possibility, and therefore [the MCA] expect[s] that evolution to continue”. In Brazil, Arbitration and Mediation Center of the Chamber of Commerce Brazil Canada (“CAM-CCBC”) notes that “there has been a noticeable increase in both the number of entities providing TPF and the number of arbitral proceedings receiving TPF”. In Sweden, the Stockholm Chamber of Commerce (“SCC”) in turn acknowledges that TPF “has certainly evolved in international arbitration” and “is likely to continue do to so going forward”. According to the Arbitration and Conciliation Centre of the Chamber of Commerce of Bogota ́(“CAC-CCB”) in Colombia, “arbitrations funded by third parties” take place in an environment without “regulatory prohibitions”.

With respect to the types of parties using financing in arbitration, as noted by ICSID, in investor-State dispute settlement TPF has been used “mainly by claimants, but has also been used by respondents, for example in the Philip Morris v. Uruguay case”. Similarly, the Hong Kong International Arbitration Centre (“HKIAC”) considers that “[f] inancing of respondents’ defenses or counterclaims may continue to evolve” and increase in availability.

2. “Wait and see” approach

A number of arbitral institutions have adopted a “wait and see” approach, by observing how third party funding develops, before embarking on any regulatory changes.

The London Court of International Arbitration (“LCIA”) occasionally sees references to third party funding in correspondence between the Tribunal and the parties, but it does not have a comprehensive view of third party funding in its cases. The CAC-CCB is cognizant that some of its cases are financed by third parties, but has “[no] exact knowledge of the frequency of the use of TPF.” Similarly, despite being aware of the growth of third party funding in arbitration, the SCC has “no data or information on which to base institutional observations”.

Not taking an active role concerning third party funding, as explained by the CAC-CCB, may also be motivated by the “neutral status” of an arbitral institution.

Yet, without doubt, international arbitration centres are aware of third party funding and are contemplating addressing third party funding in the future. The Board of the SCC is “evaluating future SCC policy with respect to third party funding”. The CAC- CCB does not rule out including provisions on third party funding in the revisions to its conciliation and arbitration rules.

The MCA has plans to include third party funding in the next revision to its rules, which it expects to complete in 2019. And, in Nigeria, the Rules Committee of the Lagos Court of Arbitration (“LCA”) is evaluating the subject for “the next version of the LCA Rules,” well aware of related issues such as “privilege, confidentiality, conflicts of interest and non-disclosure agreements”.

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AS VIEWED BY THE HKIAC, “ARBITRAL INSTITUTIONS SHOULD RECOGNISE THE USE OF TPF IN ARBITRATION.

3. Active guidance model

Other arbitral institutions around the globe, including the International Court of Arbitration of the International Chamber of Commerce (“ICC”), CAM-CCBC, and the Courts of the Dubai International Financial Centre (“DIFC”) have taken a proactive stance on TPF by issuing guidelines or practice notes.

In 2014, ICC France issued a Practice Guide on Third Party Funding. Based on information collected from different funds and brokers, and various practical experiences of third party funding in arbitral proceedings, the Practice Guide provides a broad overview of TPF by briefly setting out a definition of TPF; the benefits and risks of TPF; the TPF actors; how to choose a funder; how funders choose which cases to fund; key elements of the funding agreement; the role of the funder in the arbitral procedure; the issues surrounding disclosure of funding; and ethical aspects of the client-lawyer relationship including privilege and conflicts of interest.

A couple of year later, the ICC adopted a “Guidance Note for the disclosure of conflicts by arbitrators,” which “aims at ensuring that arbitrators are forthcoming and transparent in their disclosure of potential conflicts”. The Guidance Note, which is incorporated in the ICC Note to Arbitrators and to Parties, alludes to third party funding by stating that arbitrators should consider, when evaluating whether to make a disclosure, “relationships with any entity having a direct economic interest in the dispute or an obligation to indemnify a party for the award”.

Due to “the fast pace in which arbitration develops”, CAM-CCBC opted to issue Administrative Resolution No. 18/2016, which “contains recommendations regarding the existence of third-party funding in arbitrations administered by CAM-CCBC”, and “provides a guide to the parties and the arbitrators on how to address the existence of third-party funding and . . . clarifies the procedure to be adopted in this case.” This approach stems from the view that “[a]rbitral institutions have a unique position of shaping the development of TPF through their institutional rules”.

In 2017, the DIFC issued Prectice Direction No.2 on Third Party Funding in the DIFC Courts addressing the issue of disclosure when TPF is involved. The Practice Direction provides that a party that enters into a funding agreement must give notice of such agreement to every other party of the relevant dispute, disclosing the funder’s identity but not the funding agreement, unless otherwise ordered by the Court.

Similarly, in 2015 the Abu Dhabi Global Markets Courts (“ADGM”) issued regulations, providing that the existence of a funding agreement, but not the agreement itself, must be disclosed.

Interestingly, the ADGM Regulations go a step further by providing that a court order may require “payment of any amount payable under a litigation funding agreement”, which means that in the event of an award favourable to a party whose arbitration was financed by a funder, that party could eventually be reimbursed the premium owed to the funder.

4. Rule changes

A third set of arbitral institutions that have contemplated the relevant issues involved and taken an active stance concerning the development of third party funding. In particular, certain arbitral institutions have recognised the existence of third party funding in their rules.

As viewed by the HKIAC, “arbitral institutions should recognise the use of TPF in arbitration and take active steps to address any associated issues to ensure the integrity of arbitral proceedings and awards”. Arbitration centres, according to the HKIAC, should also “organise events to train users, lawyers and arbitrators on TPF and facilitate discussions between them and funders on the topic.”

After the Third Party Funding for Arbitration Sub-committee of the Law Reform Commission proposed on 19 October 2015 that third party funding be permitted, Hong Kong legalised the use of third party funding in international arbitration. The HKIAC released new Rules in November 2018 that contain express provisions on disclosure, confidentiality and costs of TPF”. For it’s part, the Hong Kong Arbitration Centre of the China International Economic and Trade Artbitration Commission (“CETAC Hong Kong”) expects that its “Code of Practice setting out the applicable standards for funders” will soon come into effect and that TPF may constitute “a good option to resolve costs pressures”. In addition, “in 2017, in CIETAC’s own investment arbitration rules, third party funding scheme was expressly provided” and its Hong Kong Guidelines currently provide principles for parties and arbitrators concerning third party funding.

2 ICC France, Guide pratique sur le financement de l’arbitrage par les tiers.3 ICC Press Release dated 23 February 2016, “ICC Court adopts Guidance Note on conflict disclosures by arbitrators”4 ICC, Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration, 30 October 2017,

available at: https://iccwbo.org/publication/note-parties-arbitral-tribunals-conduct-arbitration/.5 ICC, Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration, 30 October 2017, para 24.6 See ADGM Courts, Civil Evidence, Enforcement and Judicial Appointments Regulations 2015, (“ADGM Regulations”) § 225.1.7 See DIFC Practice Direction No. 2 of 2017 on Third Party Funding in the DIFC Courts, par. 4.8 ADGM Regulations, § 225.10-11.

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A light regulatory approach can also be observed in Singapore in SIAC’s 2017 Investment Arbitration Rules, which acknowledge TPF as an option to finance arbitrations. Those rules also confirm the Tribunal’s powers to order the disclosure of the third party funding arrangement and the identity of the funder.

In August 2018, ICSID released its Proposals for Amendment to the ICSID Rules (“Proposals”), which also concern third party funding. As explained by ICSID, the Proposals treat “awareness of [third party funding] and the avoidance of potential conflicts of interest as early as possible”, by requiring “both parties to disclose the existence of TPF”. The disclosure “relates to the existence of TPF and the identity of the funder. The actual funding agreement need not be disclosed pursuant to this proposed rule, as its intent is to prevent conflicts of interest with potential arbitrators or conciliators”.

Although not an arbitral institution in itself, the United Nations Commission on International Trade Law (UNCITRAL) is also looking at third party funding in the context of investor-state arbitration. UNCITRAL Working Group III, tasked with examining the possible reform of investor-State dispute settlement, has identified as one issue for discussion the potential need for harmonised rules or regulation of third party funding.9

II. Consensus and controversy

The role of arbitral institutions with respect to third party funding has evolved in recent years. As reviewed above, some institutions have adopted a “wait and see” approach, whereas others are providing active guidance to parties and tribunals and/or revising their rules to specifically address third party funding. What are the areas of emerging consensus, and what remains controversial?

1. Guarding against conflicts of interest

There appears to be a trend toward disclosure of the existence of funding and the name of the funder. From the perspective of the arbitral institutions, this makes perfect sense: the presence of another entity could have the unwanted effect of creating a perceived conflict of interest, for example if an arbitrator’s law firm had previously done work for the funder on an unrelated matter. Even when disclosure is not explicitly required in the institution’s rules, they may otherwise encourage disclosure. For example, the Secretariat of the CCBC “actively encourages parties to disclose their funding sources in international [...] arbitrations.”

We expect more arbitral institutions to follow suit. This may lead to clear guidelines (or simply clear practices) setting out how and when that disclosure should be made. This is in line with one of the institutions’ core activities: to ensure the integrity of the arbitral process by avoiding actual or perceived conflicts of interest involving arbitral tribunals.

Current or proposed arbitration rules of various arbitral institutions – including HKIAC,10 SIAC,11 CIETAC,12 ICSID13 – reflect a potential emerging consensus that a funded party should be required to disclose the existence of the funding agreement and the identity of the funder, at least in the context of investor-State dispute settlement.

9 See http://www.uncitral.org/uncitral/en/commission/working_groups/3Investor_State.html.10 2018 HKIAC Administered Arbitration Rules, Art. 4.3(i), 5.1.(g), 27.6(i), 27(7)(f).11 Investment Arbitration Rules of the Singapore International Arbitration Centre, SIAC Investment

Arbitration Rules (1st Edition, 1 January 2017), Art. 24.l.12 CIETAC, China International Economic and Trade Arbitration Commission International Investment

Arbitration Rules (For Trial Implementation) 2017, Art. 27(2).

Yasmin Mohammad Head of International Arbitration

VANNIN CAPITAL

Anastasia Bondarenko Associate Director

VANNIN CAPITAL

José Antonio RivasManaging Director

VANNIN CAPITAL

Ania Farren Managing Director

VANNIN CAPITAL

Alexandra Dosman Managing Director

VANNIN CAPITAL

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In general, arbitral institutions do not impose an obligation to disclose the funding arrangement between the funder and a client and/or its counsel, even though some arbitral institutions recognise that subject to the circumstances of the case, the Tribunal has the power to order such disclosure.14 Should a tribunal opt for disclosure of a funding arrangement, it still has a number of alternatives to protect the confidentiality of the arrangement and any sensitive and proprietary information contained therein, including allowing redactions to the funding arrangement, or disclosure for in camera review, before ordering a full disclosure of the arrangement.

2. Confidentiality

Only one set of rules addresses the confidentiality or privilege of documents provided to third party funders. The 2018 HKIAC Administered Arbitration Rules contain an article on confidentiality setting out the general rule that no party may publish, disclose or communicate any information relating to the arbitration, an award or an emergency decision. The rules also provide a list of exceptions permitting disclosure, such as disclosure to the parties’ witnesses and experts, to a governmental body which must by law publish the information, or disclosure to protect a legal right or interest). Importantly, these exceptions also permit disclosure to “a person for the purposes of having, or seeking, third party funding of arbitration”.15

3. Security for costs

On the questions of if and how third party funding should influence a tribunal’s consideration of an application for security for costs, certain arbitral institutions avoid regulation and leave this and other subjects for the tribunals’ analysis on a case by case basis. ICSID has explained that its proposal “is concerned mainly with the avoidance of potential conflicts of interest as early as possible” and that “[o]ther aspects of regulation of TPF are properly left with States in their instruments of consent and with Tribunals in the context of specific fact situations”.

Of those arbitration centres that have issued provisions on security for costs and third-party funding, their rules provide that there is no automatic presumption of security for costs when a third party funding arrangement exists. For instance, while DIFC’s Subsection 8 of Practice Direction No. 2 enables the courts to take funding into account when deciding security for costs applications, it expressly provides that the existence of third party funding “shall not by itself be determinative” of an order for security for costs.16 Similarly, the 2018 HKIAC Administered Arbitration Rules and CIETAC’s 2017 International Arbitration Rules provide that the tribunal “may” take into account the existence of any third party funding arrangement when determining issues related to the costs of the arbitration, but neither of those rules provide that security for costs must be ordered when there is third party funding.17

4. Party assistance

Arbitral institutions are above all neutral entities with an overarching interest in safeguarding the rule of law. With that as a given, one can imagine several potential roles arbitral institutions could play with respect to the use of alternative funding arrangements by parties using their services. For example, arbitral institutions could take the lead in assisting parties that are less sophisticated by informing them of the option of outside funding. Not all funders are well-capitalised and reputable; arbitral institutions may play a role in setting out objective criteria to look for when selecting a funding partner. Arbitral institutions could (either alone or in concert) develop best practices that could assist parties contemplating alternative funding arrangements for their cases.

14 See CIETAC, China International Economic and Trade Arbitration Commission International Investment Arbitration Rules (For Trial Implementation) 2017, Art. 27(2)15 2018 HKIAC Administered Arbitration Rules, Art. 45.3(e).16 DIFC Practice Direction No. 2, Subsection 8.17 See 2018 HKIAC Administered Arbitration Rules, Art. 34.1; see also CIETAC, China International Economic and Trade Arbitration Commission International Investment

Arbitration Rules (For Trial Implementation) 2017, Art. 27(3).

II. Conclusion

Arbitral institutions have played and continue to play a foundational role in international arbitration. Although the use of alternative funding arrangements is relatively new, arbitral institutions are taking up the challenge of integrating this element of party choice into their practices and rules—always guided by the fundamental principle of safeguarding the fairness and integrity of the arbitral process. Vannin intends to renew its survey periodically to track changes in rules, practices, and viewpoints in this rapidly evolving field.

VANNIN CAPITAL’S INTERNATIONAL ARBITRATION TEAM

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