Third Party Funding

Third-party funding (TPF) in arbitration refers to the financial support provided by a third-party entity to a party involved in arbitration proceedings. The third-party funder typically provides financial resources to cover the costs associated with the arbitration process, including legal fees, administrative costs, and other expenses. 

In exchange for their investment, the funder typically receives a percentage of the proceeds if the funded party wins the arbitration. TPF has become increasingly prevalent in international arbitration and is seen as a valuable tool for litigants who may not have the financial capacity to pursue arbitration independently.

 

Understanding Third-Party Funding

Third-party funding has gained significant traction in recent years, particularly in international commercial arbitration and investment treaty arbitration. The concept allows parties to access justice, even if they lack the necessary financial resources to cover the costs of arbitration, by bringing in an external party who is willing to invest in the case in exchange for a potential return if the case is successful. 

This practice is commonly used by individuals, companies, and even governments in complex, high-stakes disputes where the costs of litigation or arbitration can be prohibitively expensive.

Key Players in Third-Party Funding

1. The Funded Party: This is the individual or organization seeking financial support for its arbitration case. The funded party could be a claimant or respondent in the dispute.
2. The Funder: The third-party funder is a company or an individual who agrees to finance the arbitration. In return, the funder typically seeks a percentage of the recovery or damages awarded in the arbitration. The funder usually has no direct interest in the underlying dispute and acts solely as a financial investor.
3. The Law Firm: The law firm representing the funded party often plays a significant role in the funding arrangement, as they help to structure the deal, advise on the merits of the case, and ensure that the funding arrangement complies with the applicable ethical and legal rules.
4. The Arbitral Tribunal: The arbitral tribunal is the panel of arbitrators selected to resolve the dispute. They may be required to be informed about the funding arrangement to avoid any potential conflicts of interest.

 

How Does Third-Party Funding Work?

Third-party funding operates through a contractual agreement between the funded party and the funder. The agreement outlines the terms of the funding, the financial obligations of each party, and the share of any eventual award or settlement. 

The funder may cover all or part of the costs of the arbitration, depending on the arrangement. Typically, the agreement also includes provisions on the funder’s right to have a say in settlement discussions, control over the strategy of the case, and the process for distributing any recovery.

 

Benefits of Third-Party Funding

1. Access to Justice: TPF enables parties who may not have sufficient financial resources to access the arbitration process and pursue claims that they would otherwise be unable to afford.
2. Risk Mitigation: TPF allows the funded party to mitigate the financial risk of arbitration, as the funder assumes the financial burden. This can be particularly beneficial in high-stakes disputes where the costs of arbitration are significant.
3. Expertise and Experience: Third-party funders often bring with them considerable expertise in handling complex disputes, which can increase the chances of a favorable outcome for the funded party.
4. Incentive to Settle: Because the funder has a financial interest in the outcome, they may push for a settlement if it is in their best interest, which can lead to quicker resolution of the dispute.
5. No Upfront Costs: The funded party does not need to pay any upfront costs for the arbitration. Payment is usually contingent upon the success of the case, meaning the funded party may not have to bear any costs if they lose.

 

Challenges and Criticisms of Third-Party Funding

Despite the advantages, third-party funding has generated criticism and posed challenges in both legal and ethical contexts. Below are some of the key challenges associated with this practice:

1. Lack of Regulation: There is a lack of uniform regulation governing third-party funding in arbitration. Different jurisdictions have different rules, and in some regions, there is no regulation at all. This lack of oversight can lead to uncertainty and potential abuse of the system.
2. Potential Conflicts of Interest: The involvement of a third-party funder may raise concerns about conflicts of interest. Funders may try to exert undue influence on the case strategy, which could affect the integrity of the arbitration process.
3. Confidentiality Issues: The relationship between the funded party and the funder could raise concerns about the confidentiality of the dispute. For example, the funder may demand to be informed of all developments in the case, which could inadvertently lead to the disclosure of sensitive information.
4. Cost and Proportionality: Some critics argue that third-party funding may lead to excessive claims and over-litigation, particularly if the funder’s financial interest drives the party to pursue a case without regard for the proportionality of the dispute.
5. Public Policy Concerns: There are concerns that third-party funding may lead to “ambulance-chasing” behavior, where funders target disputes that are not in the best interest of the funded party or are unlikely to succeed.
6. Ethical Concerns: There are concerns regarding the ethical implications of third-party funding, particularly with respect to the funder’s influence on legal strategy, decision-making, and the ultimate disposition of the case.
7. Unequal Power Dynamics: The presence of a funder can create an unequal power dynamic in the arbitration, particularly if the funder has substantial influence over how the dispute is handled.
8. Lack of Transparency: Third-party funding agreements are often confidential, and as a result, there is a lack of transparency regarding how much funding is being provided, the terms of the arrangement, and the financial arrangements between the funder and the funded party.

 

Legal Framework and Regulation of Third-Party Funding

The regulation of third-party funding in arbitration varies from jurisdiction to jurisdiction. While some countries, such as the United Kingdom and Australia, have developed specific frameworks and guidelines to regulate third-party funding, others do not have clear regulations in place.

• United Kingdom: In the UK, third-party funding is generally allowed in arbitration and litigation. However, there are ethical rules and regulations regarding conflicts of interest, particularly with respect to the funder’s involvement in the strategy of the case.
• Australia: Australia has a more developed regulatory framework for third-party funding. It is permitted in both litigation and arbitration, but there are strict regulations governing the transparency of funding arrangements and the relationship between the funded party and the funder.
• United States: The practice of third-party funding in arbitration is permitted in the United States but is subject to various rules regarding confidentiality, conflicts of interest, and fee arrangements.

 

Best Practices for Third-Party Funding

1. Disclosure of Funding: It is essential for the funded party to disclose the existence of third-party funding to the arbitral tribunal. Transparency is key to ensuring the integrity of the arbitration process.
2. Structured Agreements: Clear, written agreements should outline the terms of the funding arrangement, including the percentage of any award or settlement that the funder will receive and the circumstances under which the funding agreement can be terminated.
3. Regulatory Compliance: Parties involved in third-party funding should ensure that the funding arrangement complies with the laws and regulations of the jurisdiction in which the arbitration is taking place.
4. Ethical Considerations: Both the funded party and the funder must consider the ethical implications of their relationship and ensure that the funder’s involvement does not unduly influence the arbitration process.
5. Conflict of Interest Management: Measures should be put in place to manage potential conflicts of interest, including ensuring that the funder does not have a direct stake in the outcome of the arbitration that could influence the proceedings.

 

Conclusion

Third-party funding has emerged as a critical development in arbitration, enabling parties to access justice and pursue claims they may otherwise be unable to afford. While it provides numerous benefits, including risk mitigation and increased access to arbitration, it also brings several challenges and criticisms related to transparency, regulation, and potential conflicts of interest. The future of third-party funding will likely depend on developing clearer regulations and best practices to balance the interests of funders, funded parties, and the integrity of the arbitration process.

 

Frequently Asked Questions (FAQs)

1. What is third-party funding in arbitration? 

Third-party funding in arbitration refers to the financial support provided by an external entity to a party involved in arbitration proceedings, covering the costs of arbitration in exchange for a portion of the recovery if the party wins.

1. How does third-party funding work in arbitration? 

A third-party funder provides financial backing to a party in an arbitration case, typically covering legal fees and arbitration costs. In return, the funder receives a share of the award or settlement if the funded party prevails.

1. What are the benefits of third-party funding in arbitration? 

Third-party funding enables parties with limited financial resources to access arbitration, reducing financial risk, and potentially speeding up case resolution. It also provides access to legal expertise and enhances the fairness of the process.

1. Is third-party funding legal in arbitration? 

Yes, third-party funding is legal in many jurisdictions, including the UK, Australia, and parts of the US. However, each jurisdiction has its own regulations governing the practice.

1. What are the ethical concerns with third-party funding in arbitration? 

Ethical concerns with third-party funding include potential conflicts of interest, the influence of the funder on case strategy, and issues related to confidentiality and transparency.

1. How is third-party funding regulated? 

Third-party funding is regulated differently across jurisdictions, with countries like the UK and Australia having specific rules and regulations governing the practice,while others have minimal or no regulation.

1. What are the risks of third-party funding in arbitration? 

Risks include conflicts of interest, potential abuse of the system by funders, lack of transparency, and the possibility that funders may have undue influence over the outcome of the arbitration.

1. Can third-party funders control the strategy in arbitration? 

While funders typically have some influence, especially regarding settlement decisions, they are generally not allowed to control the legal strategy or decisions related to the merits of the case. Ethical guidelines exist to prevent such undue influence.