THIRD PARTY FUNDING IN ARBITRATION

THIRD PARTY FUNDING IN ARBITRATION

Third-party funding is prevalent in litigation and arbitration both domestically and internationally. There is still no consensus on how this novel economic activity should be understood. Some qualify TPF as commercial lending contracts, while others consider it to be a form of insurance contracts. Basically, third-party funding involves a third party financing the legal representation of a party in a case as an alternative to the party self-funding the legal representation or receiving attorney financing through a contingent or conditional fee agreement.

If the funded party is the plaintiff, then the third-party entity contracts to receive a percentage or fraction of the proceeds from the case or a multiple of the funds invested, if the plaintiff wins. If the funded party is the defendant, then the third-party entity contracts to receive a predetermined periodic payment from the defendant, similar to an insurance premium In addition, depending on the structure of the funding arrangement, the funder may legally control or influence aspects of the legal representation or may completely take over the case and step into the shoes of the original party.

?Third-party funding is no longer a new phenomenon, but rather is a mainstay in global commerce and dispute resolution. Yet, many observers still consider the third-party funding industry a “wild west” due to a lack of regulation in many countries and a lack of uniformity within some of the countries that do have regulations, particularly those countries that have sub-state political divisions (e.g., provinces, territories, etc.) with conflicting laws.

Advantages and disadvantages of Third-party Funding

A potential claimant may approach a funder for various reasons:

·????????Necessity: Arbitration can be expensive. If a claimant does not have the means to pursue a meritorious claim, funding may well be its only option.

·????????Risk management: Claimants with the funds to arbitrate may want to lay off some of the risk associated with costly arbitration, and the inherent unpredictability of costs, and be prepared to give up a proportion of any recoveries to do so. It also enables a company to invest that money elsewhere. In addition, the funded party is relieved of costs pressures and cash-flow issues associated with the legal costs of the arbitration.

·????????Validation: Funders are only interested in good claims. They will therefore conduct extensive due diligence and carry out their own analysis of the merits before agreeing to provide funding. This objective analysis may assist the claimant to shape its case strategy, and may also encourage early settlement once the other party is made aware that the claim has the backing of a funder.

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Whilst it is incontrovertible that TPF improves access to justice, one needs no soothsayer to realise that it equally attracts some challenges which includes:

·????????Expensive: A successful claimant will generally have to pay a significant proportion of damages recovered to the funder.

·????????Autonomy: Although funders are generally prohibited from taking undue control or influence in an arbitration, there may be some loss of autonomy on the part of the funded party (in particular when considering settlement) as funders may reserve the right of approval of the settlement.?

·????????Disclosure: Increasingly, funded parties are being required (whether by order of the tribunal or the applicable institutional rules) to disclose the fact of funding and the identity of the funder (but not necessarily the funding terms). This in turn may prompt the respondent to make an application for security for costs.

·????????Costs: Substantial costs can be incurred when packaging the case for presentation to a funder. These will have been wasted if the application for funding is unsuccessful. Even if successful, funders are not usually liable for any costs incurred before the funding arrangement is put into place, including the costs of packaging and the negotiation of the funding arrangements.

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REGULATORY OVERVIEW

Globally, the debate about third-party funding arises in the context of international arbitration and focuses on whether domestic laws on third-party funding at the place or seat of arbitration or at the place of enforcement may or should apply to third-party funding of international arbitration. Some jurisdictions, such as Hong Kong, explicitly allow third-party funding in international arbitration while generally prohibiting the practice in domestic litigation. In contrast, other jurisdictions, such as Singapore, currently prohibit third-party funding in all fora, including international arbitration. Most countries fall somewhere in between.

Indeed, the mischief that both doctrines were devised to remedy,?were prevalent in the public justice system as administered in court rooms and the application of the doctrines at common law was confined to litigation. Their applicability cannot be extended beyond that remit. The concerns for holding otherwise have been noted to include, among others, the erosion of the party autonomy doctrine and the same have been reinforced elsewhere.

In view of the foregoing, the contention that TPF extends to arbitration appears rather curious. The scale of the application of the doctrine of champerty and maintenance under common law cannot be readily stretched or modified to apply to circumstances and situations not otherwise contemplated at common law except modified by local legislation(s) in that regard. It is, therefore, pertinent to note that at the time of penning this article, there are no local legislations or case law positing that the doctrine extends to the field of arbitration. The attendant consequence is, indeed, that TPF in Nigeria-seated arbitrations are, in all intents and purposes, legal. The law remains that whatever is not prohibited is allowed.

On another note, there are various incidences of TPF that do not entail the funding of a claim/defense by a formal funder for an agreed consideration. The financing of a claim by a lawyer or law firm on a?pro bono or contingency basis also falls under the umbrella of TPF. The RPC, which regulates the conduct of legal practitioners, only provides for contingency fee and not TPF. The term "contingency fee" is defined by the RPC as:?"the fee paid or agreed to be paid for the lawyer's legal services under an arrangement whereby compensation, contingent in whole or in part upon the successful accomplishment or deposition of the subject matter of the agreement, is to be of an amount which is either fixed or is to be determined under a formula."

However, It is instructive to note that under?Rule 50(4) RPC, a lawyer shall not enter into a contingent fee arrangement without first informing the client of the potential effects.

These arrangements, either in arbitration or litigation, are legal and permissible under Nigerian Law. Earlier decisions of Nigerian Courts adjudging contingency fee arrangements as at best unprofessional and at worst champertuous?have since been supplanted by subsidiary legislations enacted pursuant to the Legal Practitioners Act.

Very noteworthy is the Arbitration and Conciliation Act (Repeal and Re-Enactment) Bill 2017 (The Bill) currently?pending?before the House of Representatives, the second legislative chambers of the National Assembly (the legislative arm of the Federal Republic of Nigeria), regulating TPF for arbitration in Nigeria.?

Finally, we should not forget that the ongoing debate on third-party funding has given rise to more awareness of its potential risks than ever before. As long as the key players in international arbitration – users, counsel, arbitrators and institutions alike – are conscious of the potential issues associated with third-party funding, they can act upon those. It may not be necessary to further regulate third-party funding if there is a common understanding thereof and generally accepted guidelines which can be relied upon in practice.

Further Reading Links

1.??????By Paul Obo Idornigie, Third Party Funding of Arbitration Post-COVID.19: A Nigerian Perspective https://nials.edu.ng/pdf/Third%20Party%20Funding%20of%20Arbitration%20Post.pdf

2.??????Nigeria: Considerations: Third Party Litigation And Arbitration Funding In Nigeria by Franklin Okeke https://www.mondaq.com/nigeria/trials-appeals-compensation/954424/considerations-third-party-litigation-and-arbitration-funding-in-nigeria-

3.??????Alexander G. Leventhal, Towards an Exceptio Fundati? Assessing a (Potentially) Emerging Exception for Third Party Funding in Investment Treaty Decisions on Security for Costs in the Wake of Armas v. Venezuela https://arbitrationblog.kluwerarbitration.com/2018/09/18/assessing-a-potentially-emerging-exception-for-third-party-funding-in-investment-treaty-decisions-on-security-for-costs-in-the-wake-of-armas-v-venezuela/

4.??????Opemipo Omoyeni, Third Party Funding in Nigerian Seated Arbitrations: Setting the Law Straight https://arbitrationblog.kluwerarbitration.com/2019/03/12/third-party-funding-in-nigerian-seated-arbitrations-setting-the-law-straight/

5.??????THE LAW REFORM COMMISSION OF HONG KONG THIRD PARTY FUNDING FOR ARBITRATION SUB-COMMITTEE CONSULTATION PAPER https://www.gov.hk/en/theme/bf/consultation/pdf/10119_Consultation_Paper.pdf