Third Party Funding

INTRODUCTION

In about a span of decade, dispute funding or litigation funding or now more commonly known as Third Party Funding (‘TPF’) is no longer just restricted to common law jurisdictions but it has gained much spotlight in international litigation and commercial arbitration, albeit high risk.

The International Bar Association (IBA) in fact has been one of the first organisations to address TPF. The 2014 IBA Guidelines in their General Standard 6(b) in assessing conflicts of interest, includes reference to third-party funders:

If one of the parties is a legal entity, any legal or physical person having a controlling influence on the legal entity, or a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration, may be considered to bear the identity of such party.”

The explanation to General Standard 6(b) provides a definition, which includes additional details:

For these purposes, the terms ‘third-party funder’ and ‘insurer’ refer to any person or entity that is contributing funds, or other material support, to the prosecution or defence of the case and that has a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration.”

INCREASING DEMAND FOR FUNDING

In recent years, with the increasing costs in arbitration and with curbs being placed on legal budgets in corporate companies, it therefore comes as no surprise that the demand for TPF has risen considerably. Also, the fact that with increasing access to justice, companies are now less hesitant in pursuing meritorious claims, while wanting to preserve their cash flow for running their business and manage risks. To simply state, TPF is not restricted to those that are impecunious. Thus, with the rising demand for TPF, a wide array of new funders has entered the global litigation financing market, showing the rapid growth of this industry.

WHY IS FUNDING SOUGHT AND BY WHOM?

The key participators in litigation funding are the claimants, funders, lawyers and possibly, funding brokers. Funding is usually sought to cover legal fees, expert fees, arbitrator’s fees, arbitral institutions fees or costs associated for enforcement proceedings or appeals.

While most recipients of TPF are claimants, but in some jurisdictions, law firms may also be the users of dispute finance. While still relatively rare, but TPF for respondents is evolving and becoming more available in the event there is a counter claim. However, the funding of respondents leads to challenges with respect to how to reimburse the funders in the event of a successful defence. In some cases, the defence of a claim could also be included in portfolios arrangement.

THE DISPUTE FUNDING PROCESS

The nature, constitution, and characteristics of third-party funding arrangements can vary from case to case. Most cases presented to any given TPF are rejected for one reason or another. There are few published statistics available, as well as statements made by some funders, which indicates rejection rate of 80 percent or higher[1].

The decision about whether to fund a claim will be arrived at following detailed due diligence by the funder (often using external counsel, and if required damages or technical experts), and the funder’s board or investment committee’s approval. Funders are concerned with the case merits, the fiscal matters of the proposed investment and the enforceability of any award. For a TPF to consider a potential opportunity there must be suitable indication of a solid claim with a well recoverable margin between the anticipated damages recovery and the anticipated budget for legal fees and costs.

RETURN STRUCTURES

A TPF providing “non-recourse” funding will usually expect to make a multiple return on the capital invested. This shows both the high-risk nature of the investment as well as the Internal Rate of Return (“IRR”) expectations of the funders. The funder’s return (or success fee) may be based on the multiple of the capital invested or as a percentage of the “claim proceeds” (the amount recovered by way of damages or settlement). Some arrangements may also include a combination of these. In the landmark decision of Essar v.Norscot[2] the arbitrator accepted that cost of the third-party funding was reasonable and the same was upheld by the English High Court.

CONTROL AND COST CONTAINMENT

Quite often the concern expressed by the claimants and lawyers is the extent to which the funders while in its efforts to control costs, maintain tight control over the case strategy, arbitration proceedings, including settlements, if any, which may in turn affect analysis of certain issues, for instance disclosures and conflicts etc. While it would be natural for the funders to exercise high degree of control to protect their investment, however, some funders report that, after their initial assessment of the case, the funders only function and monitor from a distance and only receive regular updates.

CONFLICTS OF INTEREST AND DISCLOSURE

The growing concerns with respect to potential arbitrator conflicts of interest have increased due to many leading arbitrators having taken up ad hoc consultant roles with some funders. Further, the interdependent relationship between funders and law firms and some arbitrators also gives rise to such potential conflicts of interest, which has thus raised several issues on disclosures. Opposition was met due to the consequences of disclosures of TPF such as frivolous challenges to arbitrators and baseless applications for security for costs.  However, with the growing demand for transparency in arbitrations, arbitral institutions are introducing mandatory disclosures. The Singapore International Arbitration Centre (SIAC) was first to give the Tribunal power to order disclosure of TPF[3]. The Hong Kong International Arbitration Centre (HKIAC) has adopted a similar approach and more recently the ICC RULES 2021[4] has also introduced the requirement for disclosure of TPF.

LEGISLATIONS AND CODE OF CONDUCT

Debate still exists with regards the regulation of TPF. While common law doctrines against ‘champerty and maintenance’ are well versed with, however, only two countries have taken action to regulate TPF in international arbitration. The Singapore Parliament passed the Civil Law (Amendment) Bill (No. 38/2016)[5]on 10 January 2017, permitting TPF for international arbitration and related proceedings in Singapore.

Similarly, on 14 June 2017, the Hong Kong Legislative Council passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance, 2017[6]for permittingTPF of arbitration and mediation in Hong Kong.

Meanwhile to regulate TPF in Australia, the Treasurer of the Commonwealth of Australia announced on May 22, 2020, that litigation funders will be subject to financial regulation that requires holding an Australian Financial Services License (AFSL)[7].

While not formally regulated, but In England and Wales, the Court of Appeal decision in the costs appeal in Excalibur Ventures LLC v. Texas Keystone Inc[8], Lord Justice Tomlinson said:

Litigation Funding is an accepted and judicially sanctioned activity perceived to be in the public interest.

Likewise, only recently the Supreme Court of India in Bar Council of India v. AK Balaji[9], clarified the legal permissibility of third-party funding in litigation and opined that

There appears to be no restriction on non-lawyer third parties funding the litigation and getting repaid after the outcome of the litigation.”

 

Additionally, few states in India including Gujarat, Maharashtra, Madhya Pradesh, Uttar Pradesh, Andhra Pradesh, Orissa, and Tamil Nadu have distinctly recognized TPF by bringing in an amendment in Order XXV Rule 1 of the Code of Civil Procedure, 1908, which empowers the Courts to secure costs for litigation by asking the financing party to become a party and depositing the costs in court.

A legal start-up in India Advok8 aims to create a third-party funding market by aiding litigants for their lawsuits through crowd funding. According to information available, they have completed funding for eight cases[10].

Third party funding has also been adopted into Canadian litigation. In 2020, the Supreme Court of Canada in a unanimous decision in the insolvency case of Quebec Inc. v. Callidus Capital Corp.[11] confirmed that funding for litigation may provide a viable path by which to maximize recovery for an insolvent company’s creditors.

However, in some jurisdictions, for instance the Supreme Court of Ireland in the case of Persona Digital Telephony Ltd v. Minister for Public Enterprise[12]held that third party litigation funding violated its laws on maintenance and champerty.

CONCLUSION

TPF has gained much acceptance in the world of international arbitration and it is a given that TPF is here to stay. As with any legal practice or institution, to reap the benefits of TPF and in providing justice with greater transparency and to further avoid uncertainties and limit its dangers, a strong mechanism is needed to support the TPF infrastructure in various jurisdictions and develop global and uniform guidelines for practitioners to rely upon. Whether in favour or against TPF, there is a need for policy makes to create an environment of assurance and where accountability is recognised for both funders and applicants in terms of operation. Further, with the recent global fiscal slowdown due to the Covid-19 pandemic, it has become difficult for most parties to pursue their claims due to liquidity crunch. If we want to encourage and promote parties to opt for arbitration, then TPF can be a practical solution. Thus it is the need of the hour for various legislatures to provide a legal framework as regards TPF. Thus, one can only hope for developments for TPF on all  fronts – legislative, regulatory and case-law.

† Hiroo Advani, Senior Managing Partner at Advani & Co.

†† Chaiti Desai,  Senior Associate at Advani & Co.

[1]https://www.thejudgeglobal.com/mistakes-to-avoid-when-approaching-third-party-funders/

[2]Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd, [2017] Bus LR 227

[3] SIAC IA Rules, Art 24.1

[4]https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/

[5] https://sso.agc.gov.sg/Bills-Supp/38-2016/Published/20161107?DocDate=20161107

[6]https://www.doj.gov.hk/en/legal_dispute/pdf/brief_note_tpf_e.pdf

[7]https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/litigation-funders-be-regulated-under-corporations

[8]Excalibur Ventures llc v Texas Keystone Inc and others (No 2) (Association of Litigation Funders of England and Wales intervening), [2017] 1 WLR 2221

[9](2018) 5 SCC 379

[10]https://epaper.timesgroup.com/Olive/ODN/TimesOfIndia/shared/ShowArticle.aspx?doc=TOIM%2F2019%2F02%2F24&entity=Ar01307&sk=57F8ABA8&mode=text

[11]9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10, see https://www.canlii.org/en/ca/scc/doc/2020/2020scc10/2020scc10.html

[12][2017] IESC 272

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