Third-party funding in arbitration: Guidance from the Chartered Institute of Arbitrators

Introduction of a new Guideline

Third-party funding (TPF) has become increasingly popular as a means of financing commercial disputes in litigation and arbitration. This has led to a number of jurisdictions and arbitral institutions considering how to respond to the use of TPF. In the UK, for example, the Civil Justice Council recently published its final report on litigation funding which recommended light-touch statutory regulation. However, its recommendations do not apply to arbitration as it concluded that arbitral centres in England and Wales are best placed to determine whether funding of arbitration should be regulated and, if so, how. Indeed, there are features of arbitration that raise unique challenges and considerations for TPF which parties, their lawyers and tribunals must be alive to.

The Chartered Institute of Arbitrators’ (Ciarb) new Guideline on Third-Party Funding (Guideline) is therefore a welcome attempt to explain and offer practical guidance on the use of TPF in arbitration.  While regulation in any given arbitration will depend on the law of the seat and applicable rules, the Guideline provides an overview as to how funding can affect the positions of the parties, the tribunal and the institution and assists parties in understanding the key issues. The advice is general rather than specific to any one jurisdiction so will be of interest to a broad range of parties, including those in the UK.

The Guideline is divided into two parts:

1. The funding process: the Guideline provides a general explanation of TPF and a helpful summary for anyone wishing to understand more about it and how it works in practice. The Guideline explains the types of funding options and the pricing models, the process for putting TPF in place, the pros and cons of TPF, typical terms of a litigation funding agreement (LFA) and the role of after the event (ATE) insurance.
2. Case management of arbitration involving a funded party: the Guideline then considers the case management impact of a funding arrangement on arbitration. This article will discuss the second part of the Guideline in more detail.

Case management of arbitration involving a funded party

The Guideline identifies various issues to consider where TPF is used in arbitration and makes some practical recommendations:

The role of funders in arbitration: The Guideline notes that most funders take a relatively hands-off approach to an arbitration, although they typically require regular updates on developments and the fees and expenses incurred. Funders will, however, often want to be consulted on strategic decisions that impact how the original budget will be spent and may want involvement in key decisions such as the choice of arbitrator or experts and in settlement discussions. The practical advice for a funded party is to ensure that the LFA they enter into clearly addresses the funder’s level of input and involvement in the arbitration and obligations on legal counsel to provide regular updates. Any agreement over the degree of control that a funder may exercise over an arbitration must also comply with all applicable laws, including the law of the LFA, the law of the seat and/or enforcement jurisdictions. An LFA should also include express terms regarding potential settlement of the arbitration and provide for a dispute resolution mechanism if there is disagreement over whether a settlement offer should be accepted.

Disclosure and conflicts of interest: The Guideline recommends that the existence of funding and the identity of the funder should be disclosed as early as possible to the administering institution (if any), the parties, counsel and the arbitrators to ensure that any conflicts of interest can be identified early, particularly relating to an arbitrator. This in turn should protect the award from being challenged subsequently due to non-disclosure of funding or of relationships or contact between the tribunal and the funder. The Guideline also notes that early disclosure is required in the rules or guidance notes of various arbitral institutions, and parties and counsel should ensure they comply with any disclosure obligations imposed by such rules, the law of the seat and/or any applicable professional rules.

Confidentiality: The Guideline explains that arbitration agreements often contain implied confidentiality obligations and so the involvement of a funder and its related entities adds complexity. Conversely, the confidentiality of a TPF arrangement may conflict with the funded parties’ disclosure obligations discussed above. The Guideline recommends that confidentiality provisions and the rules on disclosure are reconciled at an early stage, and confidentiality is extended to enable communication with all interested parties, which may go beyond the funder to its affiliates, brokers and insurers. Parties should also ensure that funders preserve confidentiality and privilege over documents and information they are provided with in accordance with the applicable rules and law. 

Costs: There are several costs related issues which should be considered when TPF is used in arbitration. An advance on costs of the arbitration is often required by arbitral institutions, however, they may be reluctant to accept payment of an advance from a non-party such as a funder. The Guideline encourages parties and funders to liaise with institutions to understand their requirements for acceptance of a non-party advance; these often include proper disclosure of the funding arrangements so the institution can be satisfied that the source of funding will not breach sanctions or anti-money laundering regimes. Similar considerations apply to the return of unused deposits by the institution. 

A second issue highlighted by the Guideline is the award of security for costs. The Guideline notes that ordering security for costs against third parties is a relatively recent development in arbitration. As the use of TPF grows, it may become more common. However, the Guideline warns that the use of TPF should not, in itself, justify an order for security on the grounds of impecuniosity of the funded party; the tribunal should instead weigh up a range of factors. 

Thirdly, the costs of TPF may be recoverable as part of a costs award in arbitration. For example, the English courts have recognised an English-seated tribunal’s discretion to award TPF costs. (This is in contrast to English court litigation where such costs are not recoverable.) The Guideline observes that whether TPF costs are recoverable will depend on the law of the seat and/or the applicable institutional rules, however, this is something parties should bear in mind as the non-funded party may, if unsuccessful, bear additional costs risk.

Conclusion

While the availability and regulation of TPF in arbitration varies between jurisdictions and arbitral institutions, the Guideline provides helpful, practical advice to parties regarding issues they should consider. However, parties intending to use TPF should ensure they seek professional advice to fully understand the laws and rules that will apply to the use of TPF in their arbitration.