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Third Party Funding in International Arbitration – new best practice guidelines launched

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The new ICCA-Queen Mary Task Force Report on Third-Party Funding in International Arbitration was launched in April 2018. The report summarises the latest thinking on Third Party Funding as it relates specifically to arbitration.  Importantly it recognises that funding has now moved to “centre stage” in the global commercial litigation and arbitration market.

It provides best practice guidelines on four key issues which will help lawyers, clients and tribunals navigate the application of Third-Party Funding to the arbitral process: disclosure and conflicts of interest; privilege; allocation of costs; and security for costs.

The Report shows that Third-Party Funding can be a valuable tool for parties to arbitration to defray costs risk or provide access to justice. Lawyers should increasingly be prepared to consider and advise their clients, against the backdrop of this Report, on whether it is one to deploy in their matter.

Disclosure and conflicts of interest

The report states that the prevailing consensus is that because the existence of funding can raise potential conflicts of interest for arbitrators, the existence and identity of funders should be disclosed at the outset of arbitration proceedings.  There are several ways in which such a conflict of interest can arise, but one obvious one is if a member of the arbitral tribunal advises or sits on the board of a funder that happens to be funding the claimant in the case.  Despite this reported consensus this has been a much debated issue, with several members of the task force and wider community arguing that disclosure would lead to unnecessary delay and more frivolous challenges to arbitrators and/or applications for security for costs. 

In summary, the best practice guidelines provide that:

  •  A party or its representative should, on their own initiative, disclose the existence of funding and the identity of the funder to the arbitral tribunal or relevant institution or appointing authority as part of a first appearance or submission or as soon as practicable once funding is secured;
  • Arbitral authorities and arbitral institutions have the authority to request such information;
  • Once disclosure is made, arbitrators and arbitral institutions need to assess the need to make appropriate disclosures of conflicts/potential conflicts.

Privilege and professional secrecy

In order to obtain funding and to update a funder on proceedings once the funding relationship is established, parties/counsel necessarily needs to share information on the case with the funder.  There is a concern that confidential  or privileged information disclosed to funders will lose its privileged status – privilege is ordinarily lost or waived when shared with a third party.   Privilege rules vary from jurisdiction to jurisdiction and it is always important to obtain local law advice.  Nevertheless, the report recommends that:

  • While the existence of funding and the identity of a funder is not privileged; certain provisions of the funding agreement may be privileged;
  • For information that is privileged under the applicable laws/rules,  tribunals should not treat that privilege as waived solely because it was provided by parties or their counsel to a funder;
  • Where the funding agreement or information provided to a funder is deemed disclosable, the tribunal should allow for appropriate redactions.

Costs and Security for Costs

The report looked at whether a tribunal should deviate from the otherwise “costs follow the event” or outcome based methods of cost allocation where the prevailing party’s costs had been funded.  Further it looked at whether the existence of funding should impact on a tribunal’s assessment of whether to grant security for costs.  In sum, the best practice guidelines provide:

  • In general, recovery of costs should not be denied on the basis that the party seeking costs is funded;
  • Whether any cost of funding is recoverable will depend on the definition in the applicable national legislation but should be subject to a test of reasonableness and disclosure of funding so that the other party has been able to assess its exposure;
  • A tribunal generally does not have the jurisdiction to order costs against a third party.
  • An application for security for costs should be determined on the basis of the applicable test, without regard to the existence of funding, though funding may be relevant  if relied upon to show that a party can meet any adverse costs award.

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