Reactive Role of International Arbitration with Third-Party Funding: Choice or Lack of Oversight?
By Jackie Momah
The use of alternative methods of funding for arbitral proceedings is not a new development. Organizations have previously used institutional loans, contingency fees and other methods of funding. However, the form of third party financing referred to in this context differs. This form deals with a scenario in which an arbitral proceeding has already been contemplated and a party (usually the claimant) then secures funding from a third party. In return the third party receives a share of the award given at the end of the proceedings if successful. The use of third-party funding (TPF), of this kind, to finance arbitral matters is a new development in the world of international arbitration. Although recent, this development has made a substantial and arguably permanent impact on international arbitration. In a private dispute settlement mechanism like arbitration, in which arbitrators are party appointed, some ethical and procedural red flags are raised with the involvement of TPF. This results from the need to prevent conflict of interest. As such, it comes as a surprise that this area of international arbitration is not adequately regulated. This therefore begs the question, as to whether this is a deliberate omission or merely a lack of oversight.
As is characteristic of any new development in society, there is the issue of whether the law can develop at the same pace. This is necessary to better regulate these emerging sectors and avoid legal blunders. This has been evident in various legal sectors, most recently in the fast-paced world of technology, in which new developments are made and the law is left to play catch up once a problem presents itself. A window of opportunity has been opened for a scenario like this to occur in the world of arbitration due to the emergence of third party financing. This issue arises as a result of the need to prevent conflicts of interest in arbitral proceedings through the use of disclosure.
A fundamental aspect of any arbitral proceeding is the need for the arbitrator to be independent of the parties involved in a dispute. A lack of independence, for obvious reasons, can compromise a claim and result in the annulment of any award given. As such, in the best interest of all parties involved in a dispute, it is required for the arbitrators and the parties to disclose any potential conflict of interest that may exist. However, this requirement has not been extended to TPF.
As the use of TPF in international arbitration has increased, so has the various individuals that play a part in these disputes. Previously, involvement was limited to the parties participating in a dispute and the arbitrators. At this level, with only these participants, disclosure is relatively straight forward. With the involvement of third-party financing and funders, another layer of potentially conflicting relationships is added to a dispute. Now, funding relationships extend to various funding institutions, specialized third party funders, hedge funds, investment banks and more. As such, there is the potential for party appointed arbitrators to have possibly biased relationships with these various funders. With this addition, one would expect the law to grow and accommodate their presence by tackling the substantially increased potential for a conflict of interest to occur. The law however has not done this, and surprisingly as it stands, there is no binding international requirement or framework to disclose the presence of third party funders in an arbitral proceeding. A space has therefore, been created for a conflict of interest to occur - one that could lead to the waste of time and resources, and also threaten the overall outcome of an arbitral proceeding.
Aware of the threat presented by the involvement of TPF, the International Bar Association published its revised practice rules and guidelines for use in international arbitration. Its general standard 6a and 7b, tackle this issue. These guidelines essentially include the requirement to disclose the presence of third party funders. However, these guidelines are not binding and require the further implementation of domestic state law to compel such disclosure. In addition, the International Court of Arbitration has also weighed in on the issue. However, it only requires arbitrators to consider disclosing such relationships as a potential conflict of interest. These measures, therefore, only skirt the issue, thus leaving the window for a conflict of interest ajar. As a result, arbitral tribunals are unable to deal with these conflicts ahead of time. International arbitration is therefore left to react to scenarios in which conflicts of interests present themselves. In the process, making the problems attributed to the lack of adequate regulation of TPF’s in this field, unavoidable. States such as Singapore and Hong Kong are aware of this threat and have taken steps to implement mandatory disclosure of TPF’s involved in an arbitral dispute. The threat posed by this potential conflict and the measures taken by other countries to deal with this, could arguably indicate a lack of international and domestic oversight in this area.
It is however evident that some compelling reasons exist for the lack of regulation of TPF’s in international arbitration. These perspectives could suggest that the current climate for TPF in this field is a choice, as opposed to a lack of oversight. It has been recognized that requiring stricter regulations will open the doors to disclosure in a manner that could unfairly hurt a claim. Thus, it may be stated that greater regulation may lead to the need to disclose more than just the presence of a funder. Disclosure beyond this could be prejudicial to the party enlisting the help of a funder. Requiring a party to go into detail on whom their funder is and the particulars of their agreement could unfairly hurt their claim, and deter the future use of this financing mechanism.
Additionally, mandatory disclosure would burden parties in a dispute with unnecessary and wasteful discovery. Further reasons include that the explicit and binding requirement for disclosure of TPF involvement in proceedings, runs the risk of unnecessary disqualifications of claims. These disqualifications are opposed to attempts made to decipher potentially difficult questions. These reasons were offered by some leading funding institutions in response to a recent proposal made to amend Local Rule 3-15. This proposal was made to the U.S. District Court for the Northern District of California. The proposal dealt with local litigation funding as opposed to third-party arbitration funding. However, it is arguable that decisions made in this field have the potential to impact TPF in arbitration. This proposal required the automatic disclosure of TPF arrangements in every civil case filed, by specifically including the words ‘litigation funders’. In response to this, various litigation and arbitration funding institutions such as Burford Capital and Bentham IMF expressed their disapproval of this amendment. After deliberating, in February, the court dropped the proposed language, only requiring disclosure in limited scenarios. Decisions such as this, and the industry views behind them may indicate that the lack of regulation of TPF regarding disclosure in international arbitration, may be the result of choice as opposed to oversight.
In all, whether the result of choice or a lack of oversight, only time will tell if the world of International Arbitration will be forced to adequately adapt to these changes or remain in the reactive as opposed to proactive position in which it currently finds itself.