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International Arbitration in 2022

Third-party funding: easing into the mainstream

Arbitration funding is benefiting from a convergence of favourable conditions.

As foreshadowed in our 2019 trends report the last three years have brought incremental clarity on the costs impact and disclosure requirements of third‑party funding in arbitration. For some businesses involved in disputes, the COVID-19 pandemic and ensuing fiscal challenges have prompted a reassessment of their capital allocation and liquidity management — questions to which third-party funding can offer a neat answer.

Arbitral case law developments confirm that the existence of third-party funding alone is not enough to justify an order for security for costs. Since the García Armas v Venezuela case in 2018 (flagged in our 2019 report, it does not appear that any funded claimant in investment arbitration has been required to post security for costs. One such order against a funded claimant was rescinded in June 2020 when it was shown that the administrator of the insolvent claimant had been unable to procure the required security (Dirk Herzig as Insolvency Administrator over the Assets of Unionmatex v Turkmenistan). Meanwhile, at least four security for costs applications against funded claimants in investment arbitration were recently rejected.

More arbitral tribunals may be awarding successful claimants their costs of procuring third-party funding. The English High Court has, for a second time, confirmed that arbitral tribunals have the power to award the reasonable cost of third-party funding to a successful claimant. In a December 2021 decision in Tenke Fungurume v Katanga [2021] EWHC 3301 (Comm), the Court rejected the proposition that the arbitral tribunal had exceeded its powers by awarding the claimant the costs that it had incurred in obtaining funding. This was consistent with the 2016 High Court decision in Essar Oilfields Services Limited v Norscot Rig Management PVT Limited [2016] EWHC 2361 (Comm). These decisions may encourage other tribunals similarly to allow recovery of funding costs.

There is still no consensus as to whether parties to arbitration must disclose third‑party funding. If anything, the trend appears to be away from mandatory disclosure, at least for commercial arbitration proceedings.

  • The ICC — still the most preferred arbitral institution globally according to a 2021 survey — adopted new arbitration rules in 2021 mandating the disclosure of the existence of third-party funding and the identity of the funder. However, the LCIA’s 2020 rules remain silent on disclosure of third-party funding. Kuala Lumpur’s AIAC similarly declined, in its 2021 rules, to require disclosure of third-party funding, stipulating only that the arbitral tribunal has the power to make necessary orders in that regard.
  • The proposed amendments to the ICSID Arbitration and Conciliation Rules, to be presented to member States for approval in early 2022, require disclosure of the identity of third-party funders, including their owners. They also expressly empower arbitral tribunals to order disclosure of further information regarding the funding agreement and the funder. The SIAC’s 2017 specialised rules for investment arbitration move slightly towards disclosure of third‑party funding. They do not require disclosure but empower the arbitral tribunal to order necessary disclosures. They also allow arbitrators to take into account third-party funding arrangements in apportioning the costs of the arbitration and in ordering one party to pay the other’s legal or other costs (reminiscent of Essar v Norscot).

 

 

The effects of the pandemic are likely to catalyse interest in third-party funding.

Market surveys suggest that companies are still constrained by their internal resources in deciding whether to pursue or forgo legal claims. But this model may have to change as businesses continue to weather the prolonged economic impact of the pandemic on supply chains and retail demand.

Liquidity management continues to be a central focus in companies’ strategies for resilience against the pandemic. This focus is coming into sharper relief as companies prepare for rising interest rates and the impending withdrawal of government stimulus programmes.

One key tool for liquidity management is capital allocation strategy, and third‑party funding of legal claims appears complementary to this strategy. Users cite the freeing up of working capital, taking cost liability off the balance sheet, and risk management as the top three key benefits of litigation funding. There is now even a growing market for the sale and purchase of arbitration awards, through which claimants can monetise awards in their favour without incurring the risk and cost of enforcement.

Consistent with the outlook for the funding market, Freshfields has a growing portfolio of funded cases and strong relationships with funders around the world. Freshfields is currently working on 15 third-party-funded international arbitrations, up from 12 cases in 2018.

What is key is that today, with third-party funding, companies struggling with the prolonged effects of the pandemic can still bring arbitration claims without impacting their liquidity.

Noiana Marigo
Partner,
New York