Third-Party Funding in Arbitration: Pros and Cons

What is Third-Party Funding?

Third-party funding (TPF) is a financial arrangement where an entity not involved in the dispute agrees to cover a party’s legal expenses. In return, this funder receives a portion of the awarded sum should the financed party succeed. Typically, the funder is an investment firm that sees potential in the case’s outcome.

TPF plays a crucial role in the arbitration process. Many parties face significant financial barriers when pursuing justice, especially when confronting opponents with deeper pockets. TPF offers these parties a way to pursue their claims without the looming threat of financial ruin. It ensures that a case’s potential is evaluated based on its genuine merits rather than the financial capability of the claimant. Aside from funding, these external entities often provide valuable expertise and resources, enhancing the chances of success. By offering this economic lifeline, TPF ensures that the arbitration process remains an accessible avenue for dispute resolution, allowing parties to seek justice without being hamstrung by financial constraints.

Do all Jurisdictions allow Third-Party Funding?

Third-party funding’s global acceptance varies, often influenced by the historical legal concepts of champerty and maintenance. Maintenance describes the action where an external party offers financial aid in a lawsuit without a direct interest in its outcome. When this external supporter anticipates a monetary gain from the result of the case, the act transitions to champerty.

Historically, these practices were viewed with suspicion. English common law prohibited them mainly due to fears of vexatious litigation and the potential for justice to be traded as a commodity. The primary objective was to prevent wealthy individuals from manipulating the legal system for personal gain, ensuring lawsuits retained genuine motivations.

Fast forward to the present, the perspective on these concepts has evolved substantially. Modern legal systems recognise the role of third-party funders in levelling the playing field, especially in arbitration. While the essence of champerty and maintenance remains, their outright prohibition has softened in many jurisdictions. Instead, there is an emphasis on regulating third-party funding to ensure transparency and fairness. As legal costs rise and the complexity of disputes increases, the role of third-party funders becomes even more crucial. Therefore, while the historical apprehensions about champerty and maintenance are noteworthy, their relevance today is framed more as a question of responsible regulation rather than outright prohibition.

The Advantages of Third-Party Funding

a. Financial Accessibility

Third-party funding offers a lifeline to parties facing the steep costs of arbitration. The financial challenges of such proceedings can discourage even the most resolute claimants. However, with third-party funders ready to provide the needed capital, potential claimants find their path to justice unhindered by financial constraints. This shift enhances the chances for redress and promotes a more inclusive arbitration process.

b. Expert Oversight and Quality Assurance

Securing backing from a third-party funder involves more than just financial considerations. Funders thoroughly evaluate every claim, ensuring each case stands on solid ground. This scrutiny benefits claimants. With a funder’s endorsement, they gain reassurance about the merits of their claim. Moreover, the rigorous assessment introduces an additional layer of quality control, leading to better-prepared and more credible arbitration cases.

c. Levelling the Arbitration Field

Resources often dictate outcomes in arbitration. Those with deeper pockets have traditionally enjoyed an advantage, making it difficult for claimants with limited means to contest effectively. Third-party funding changes this equation. With external funding, less affluent claimants can mount a compelling challenge, ensuring that financial might does not overshadow the meritorious claims. TPF evens the odds, fostering a more balanced and just arbitration environment.

d. Indication of Case Strength

The mere act of securing third-party funding enhances a case’s potential. Given their preference for cases with a high likelihood of success, a funder’s involvement often signals a claim’s strength. This endorsement serves dual purposes. For claimants, it offers validation and boosts morale. For opposing parties, it signifies a well-founded challenge, possibly encouraging more cooperative negotiation stances.

The Disadvantages of Third-Party Funding

a. Ethical Concerns

One cannot overlook the ethical challenges tied to third-party funding. The inherent nature of an external funder’s investment could lead to perceived conflicts of interest. Specifically, when funders potentially prioritise their financial interests over a claimant’s best outcome, doubts arise. Though funders typically refrain from direct control over the proceedings, their financial stake can raise concerns about the true independence of decisions within the arbitration process.

b. Financial Costs and Considerations

While external funding can provide necessary financial relief, it comes at a price. Funders, driven by profit motives, often claim a significant share of any awarded amount. For claimants, this means parting with a substantial portion of their compensation. Moreover, if the arbitration does not favour the claimant, certain agreements could impose further financial obligations on them, heightening the economic stakes.

c. Impact on Settlement

The presence of third-party funders can subtly alter settlement dynamics. Funders might push for extensive claims with larger payouts since their primary focus lies in maximising returns. Such an approach can sometimes contradict a claimant’s interest, especially if a quicker, modest settlement proves more beneficial. This tension can delay resolution and add layers of complexity to negotiations.

d. Disclosure and Transparency Issues

The debate around the disclosure of third-party funding remains intense. Proponents of transparency argue that revealing a funder’s involvement is essential to prevent hidden conflicts. Opponents counter that such disclosures might expose a funder’s strategic insights. The inconsistency in disclosure norms across different regions adds another layer of complexity, leading to potential blindsides and tactical gamesmanship.

e. Enforcement Challenges in Specific Jurisdictions

Third-party funding’s efficacy falters when arbitral awards face enforcement in jurisdictions retaining champerty and maintenance prohibitions. Here, a third-party funder’s participation could deem the award unenforceable. Claimants may find themselves with a favourable decision yet obstructed from enforcement due to local legal views on third-party funding.

Is a Funder Liable for the Funded Party’s Adverse Costs?

In several jurisdictions, a third-party funder is not directly burdened with covering adverse costs determined by arbitral tribunals unless specified in the funding agreement. This stems from the tribunal’s general lack of jurisdiction to impose an adverse costs order against third-party funders. Typically, a funder is not a signatory to the arbitration agreement, which exempts them from the tribunal’s jurisdiction for cost orders. Thus, they remain shielded from adverse costs orders during arbitration proceedings. The onus to address any risk related to adverse costs awards rests with the funding agreement. Parties can also acquire an additional layer of security by obtaining insurance covering any financial obligations arising from such adverse costs.

Navigating the Regulatory Landscape

Legal perspectives on third-party funding vary across different regions. As parties consider external financial support, understanding these disparate viewpoints becomes vital. Some jurisdictions have openly accepted this funding mechanism, recognising its value in providing greater access to justice, especially for those facing financial constraints. Conversely, some regions remain apprehensive due to longstanding doctrines like champerty and maintenance.

For parties contemplating third-party funding, it is imperative to identify and understand the jurisdictions where champerty and maintenance are still concerns. Entering a funding agreement without such knowledge may result in unforeseen legal consequences, complicating the arbitration process. A prudent step would be to conduct comprehensive legal research or to consult with legal experts before finalising funding arrangements. Such measures ensure compliance with the law and position parties advantageously in any subsequent disputes.

Securing Third-Party Funding: A Practical Guide

a. Understanding the Agreement

When evaluating third-party funding options, it is imperative to analyse the funding agreement thoroughly. Every term and provision has potential ramifications, not just financially but also legally. Parties must identify and assess all associated risks and duties, ensuring no surprises surface later.

b. Selecting a Reputable Funder

Choosing the right funder can profoundly impact the arbitration’s trajectory and outcome. Assessing a funder’s reputation offers a critical first step. Funders with specific expertise in the dispute’s subject matter bring more than just money; they provide valuable insights. A transparent approach in all their dealings signals their commitment to fairness and integrity. Moreover, evaluating a funder’s track record, particularly their history of successful engagements, gives a reliable measure of their reliability. The ideal funder offers both monetary support and a wealth of experience.

c. Disclosure requirements

The disclosure mandates set by different arbitration fora regarding third-party funding differ and evolve. Parties must stay abreast of these changing standards, always ensuring compliance. A misstep in meeting these standards can introduce complications and might even challenge the validity of an award. It’s essential to be well-informed and, when in doubt, consult with seasoned legal experts.

d. Maintaining Independence and Impartiality

The significance of retaining independence and ensuring impartiality in the arbitration process intensifies with third-party funding. Clear operational guidelines are paramount, defining the relationship between parties and funders. An ideal relationship sees no undue influence from the funder over the dispute’s proceedings or outcome. Efficient communication is critical, ensuring all parties remain informed and maintaining the arbitration process’s sanctity. Additionally, including specific clauses in the funding agreement that emphasise the necessity of impartiality can be beneficial. Such clauses can also set clear boundaries, delineating the funder’s role and influence.

Conclusion and Final Thoughts

Third-party funding in arbitration offers valuable financial solutions but requires thoughtful evaluation. One should not hastily enter into such agreements without a comprehensive understanding of the terms and potential implications. It is crucial to assess each decision’s immediate benefits and long-term consequences in this process. The choice of a funder, the nuances of the agreement, and the awareness of evolving disclosure norms all play critical roles. Seeking advice from legal professionals becomes not just advisable but essential. Their expertise can demystify the challenges and ensure that the choices align with financial objectives and ethical standards. A well-informed decision rooted in expert counsel offers the best path forward.