International arbitration can be a costly affair, and it is not uncommon for parties to look for alternative means of financing their claims. Third-party funding (TPF) is one such means, which allows a non-party to fund an arbitration in exchange for a share of the award or settlement. The use of TPF in international arbitration has grown significantly in recent years, but it is still a controversial issue. In this blog post, we will explore the benefits and drawbacks of TPF in international arbitration and shed some light on its potential impact on the legal landscape.
Benefit of Third-Party Funding
The benefits of TPF in international arbitration are apparent. Parties who are unable or unwilling to bear the costs of arbitration can access needed funds. The availability of TPF also helps to level the playing field between parties with disparate financial resources, thereby promoting access to justice. In addition, TPF can transform previously unenforceable or unviable claims into winning cases. This situation can only benefit parties who may have suffered wrongs that would have gone unchecked in the absence of the funding.
On the flip side, TPF raises ethical concerns, such as conflicts of interest and confidentiality issues. The source of TPF may have interests that conflict with the claimant or are unrelated to the dispute, for example, a competitor, a supplier, or a customer of the claimant. To avoid such conflicts, claimants may need to disclose sensitive information to TPF providers, and this could compromise the confidentiality of the legal proceedings. In addition, the economic pressure from funders could potentially interfere with a party’s ability to decide on settlement agreements or the conduct of the arbitration. Limitations on TPF can serve the interests of justice by avoiding these kinds of ethical issues.
Third-Party Funding Consequences
TPF can also have consequences for the enforcement of arbitral awards. The increasing use of TPF raises questions of whether the funder can be held responsible for the enforcement of the award. The ICCA-Queen Mary Task force addresses this issue with the principle of Non-Party-Paying-Rule (NPPR). According to the rule, TPF providers should not participate in post-award enforcement proceedings, except when trying to enforce security interests. One might argue that by not ensuring the enforcement of the award, the involvement of funders lacks a motivation for choosing and funding only winning cases if they know they can easily walk away from enforcement burden.
Furthermore, TPF sometimes entails additional costs and related risks, which may reduce net award proceeds in the event of success. The share of the award given to funders for funding the arbitration could assuage what the claimant stands to gain from the arbitration. The shortfall in income from the award could even lead to a problematic legal collection process. This particular issue has been raised by critics of TPF who argue that it risks driving claims that are less substantial, but more fundable. For more information on third party funders visit Omni Bridgeway – Litigation financing | Litigation funding
Third-party funding (TPF) can be a powerful means of reducing the burden of dispute resolution, especially for smaller or routine claims that may not otherwise attract financial backing. TPF has the potential to improve access to justice, but concerns around ethics, costs, and enforcement limit its universal applicability. Despite the lack of a regulatory framework for TPF in international arbitration, the UNCITRAL Working Group III, which includes the largest users of international arbitration, is currently addressing the issue and may provide guidelines for a standardized approach to the practice. In the meantime, TPF remains a valuable tool for certain cases, although its use should be carefully evaluated in light of ethical and legal considerations. Our law firm work with third party funders. For more information on the matter please Contact Our Office – Transnational Matters