Developments in third party funding in arbitration

Introduction

This article examines recent Asian developments in legalization of third party funding and contrasts these with the approach in England and Wales where the market is more established. It also looks at the emergence of portfolio funding and how that may impact on disclosure of conflicts of interest in London seated arbitrations.

Recent Asian developments in legalization of third party funding

In England and Wales, the passing of the Criminal Law Act 1967 formally eliminated the archaic legal bars of maintenance and champerty to third party funding in England, which paved the way for the development of the funding industry in the London arbitration market. Since this time, the approach to third party funding in arbitration has been a combination of an ad hoc, market- and case law-driven one. Nowadays the industry is predominantly self-regulating, with some funders volunteering to be members of the Association of Litigation Funders which sets out for its members certain minimum requirements for third party funding. A substantial proportion of the market, however, is unregulated.

The arbitral hubs of Singapore and Hong Kong have recently followed the English approach by abolishing the traditional doctrines of maintenance and champerty for third party funding in arbitration. By contrast to England, however, these jurisdictions have also introduced laws which provide for oversight of the industry.

In February 2019, Hong Kong implemented legislative amendments to provide for the legality of third party funding of Hong Kong seated arbitrations. The amendments will require third party funders to submit to Hong Kong’s Code of Practice for Third Party Funding in Arbitration which prescribes inter alia capital adequacy requirements; processes and procedures required for identifying and disclosing conflicts of interest; and terms that must be included in the funding agreement regarding termination, control and liability for costs, including adverse costs. Notably, there is an advisory body overseeing the compliance with the Hong Kong Code. This can be contrasted with the position of the litigation funders in England who voluntarily elect to membership of the self-regulating Association of Litigation Funders.

Another important point to consider when examining the new Hong Kong Code is the requirement of systematic disclosure of the participation of a third party funder. This is in contrast to England and Wales where disclosure is a voluntary process, moderated only by the tribunals’ power to order disclosure.

The Hong Kong developments followed shortly after similar amendments in Singapore which has also now opened up to third party funding of arbitrations seated in the jurisdiction. The introduction of new laws in Singapore included a comprehensive suite of legislation addressing issues ranging from minimum eligibility requirements of paid-up share capital for third party funders to counsels’ duties in respect of disclosure of the existence of a third party funding agreement. Interestingly, the latter strikes a different position to the one in Hong Kong, where the duty to disclose is imposed on the parties themselves.

These moves by Singapore and Hong Kong come at an important time with the roll out of the Belt and Road Initiative by China. This ambitious cross-border infrastructure project will no doubt generate disputes and Hong Kong and Singapore are seeking to position themselves as leading jurisdictions for the resolution of such disputes.

Third party portfolio funding

The recent decision of Snowden J in Davey v Money [2019] EWHC 997 (Ch) has rocked the English litigation funding market, eroding the certainty the Arkin cap (where a funder’s liability for adverse costs was limited to the amount of funding provided to the Claimant) had provided as to the exposure of litigation funders to adverse cost orders in English litigation. These changes, although significant, have had a limited impact on the third party funding market for arbitration – third party funders are neither party to the arbitration agreement nor the arbitral proceedings and so are not subject to the tribunal’s jurisdiction, and risk for adverse costs awards is therefore a matter for the funding agreement.

In the arbitration space, however, the general trend of increasing costs of initiating and running international commercial and investment treaty arbitration has led to an increase in the number of funded cases. With the growth of the industry, third party funding options are increasingly creative as the market seeks to expand beyond impecunious claimants to sophisticated commercial clients who are willing to pay the costs of third party funding in return for spreading their legal risk and move arbitration expenses off their balance sheet.

One interesting trend is the development of portfolio funding, where funders provide a monetary package which can be deployed across multiple matters. According to Burford Capital’s 2018 Litigation Financing Annual Report, over half of its committed capital was deployed under portfolio arrangements rather than funding on a matter by matter basis.

Portfolio funding generally operates in two ways

• Multiple disputes of a single party with various risk profiles are packaged together and funding is provided across all the matters on a cross-collateralization basis. For the most part, these will be claims but there is the potential to fund the costs of defending cases within a portfolio arrangement. Third party funders promote this type of financing as benefiting corporate entities due to the differing accounting treatment of legal costs and debts when supported by a third party funder.
• The funder directly contracts with a law firm, providing funding of matters it is pursuing on a conditional fee arrangement basis. This latter type is also known as law firm financing. Third party funders promote this type of funding as beneficial to firms which are unable to take on high-risk but also high-value work.

Portfolio funding gives rise to additional conflict of interest challenges. The ICCA QMUL Report into Third Party Financing identified a gap in the IBA Guidelines on Conflicts of Interest in International Arbitration as conflicts of interest are framed in terms of direct and indirect economic interests in the outcome of arbitrations. The cross-collateralization of claims means that the economic interest is spread across the portfolio as a whole and is not tied directly to the outcome of one claim which ultimately fails to capture portfolio funding and law firm financing.

Potentially, the conflict of interest concerns would be mitigated by systematic disclosure where a claim is funded. Opponents to systematic disclosure argue, however, that there can be procedural and strategic impacts flowing from disclosure of funding, such as where respondents drive up the costs of the case through frivolous applications and challenges, prolonging the arbitration. It is not clear how substantial such risks are. However, these considerations would have to be assessed against the risks to enforcement and challenge of arbitral awards where an undisclosed conflict surfaces following the issuance of an award.

One thing is certain though, with third party funding available now in Singapore and Hong Kong, the global market will only continue to grow and as funding becomes more prevalent its use, and the demands of the market, will evolve. This is an interesting time for the funding market.

The authors would like to thank Will McCaughan for his assistance with this article.