by Duarte G. Henriques, BCH Advocados*
Some time ago, a question was asked to the members of the ICC Institute of World Business Law, of which I am a member, aiming at contributing to its quarterly newsletter: are third party funders a game-changer or business as usual?
At the time I was not able to timely answer that question, but now I will try to resume my thoughts.
This question is undoubtedly both challenging and distressful, but I would tend to take a different approach.
While it is challenging in consideration of the myriad of issues that may be encompassed by the idea of “third party funding”, it is at the same time capable of producing numerous sentiments, not all of a comforting nature – this is what the commentators will tell us.
Indeed, regarding this topic, it is now common to hear and read that it may raise feelings, and therefore concerns, about honesty, greed, venality, legitimacy, and above all, the integrity of arbitration as a means of resolving disputes.
Without any concern regarding citations, I would sum up some thoughts put forward in some public discussions that have already taken place (I stress that the following are observations made by others).
It has been said that it is unquestionable that third party funders play a significant, if not prevailing, role in most of the major legal actions and arbitral proceedings. They provide funding, and therefore they make an investment that is based purely on financial, patrimonial and risk assessment considerations. At the end of the day, it is “their” money that has (also) been put at stake. Consequently, it may seem obvious that the funder must be allowed to have a “word” when choosing the “players” (arbitral institutions, arbitrators, counsels, etc.). This may seem an admissible intervention, although sometimes this is the least that funders do. Often, their “word” is formally taken as advice, but in practice it may well be an instruction. So those voices say.
Hence, concerns about the independence and impartiality of the arbitrators are immediately put forward. The role of counsels is also at stake: more likely than not, counsel will tend to follow the interests of the funders – who are the players that provide referrals – rather than those of the parties. Indeed, it is not uncommon to find a lawyer or counsel struggling against a settlement (or to reach a settlement) simply because it will allow an easier repayment of funds supplied by funders. Again, as others say.
It has also been asked: who will refuse to be referred by a TPF? Who will say “No” when asked by a funder to provide their CV to an interested party? Will he or she be able to later say “No” to an instruction from the funder? Will he or she be free from any bias to side with the party that appointed him or her by means of the funder’s “advice”? Furthermore, will any ethical problem connected with third party funders be solved by disclosure?
The path is not at all clear.
One may now turn to other questions regarding third party funders.
The most common question is two-folded: what kind of information should be disclosed about third party financing and what the consequences are of such disclosure?
Regarding the information to provide, the recent trend seems to point in the direction of full disclosure. For instance, very recently, in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan (ICSID Case No. ARB/12/6), the arbitral tribunal ordered the claimant to ‘confirm to Respondent whether its claims in this arbitration are being funded by a third-party funder, and, if so, shall advise Respondent and the Tribunal of the name or names and details of the third-party funder(s), and the nature of the arrangements concluded with the third-party funder(s), including whether and to what extent it/they will share in any successes that Claimants may achieve in this arbitration’ (order no. 3 of 12 June 2015 by Julian Lew). In another recently reported case (Eurogas Inc., Belmont Resources Inc. v Slovak Republic – ICSID Case No. ARB/14/14) the arbitral tribunal decided that the claimant should disclose the identity of the third-party funder.
On the other hand, the arbitration community did not reach consensus as to the conclusions that must be drawn from disclosure nor the consequences that follow the appearance of a third party funding the claimant.
Without regard to the impact that such appearance may have with respect to the independence and impartiality of the arbitrators (see General Standard 6(b) and 7(a) of the IBA Guidelines on Conflicts of Interest in International Arbitration — 2014), some take for granted that third party funders may not be ordered to pay the costs of the arbitration should the claim collapse. However, there is already case law supporting the view that third party funders must bear the costs if they hold a sufficient degree of economic interest and control in relation to the claim (see UK cases Excalibur Ventures LLC v. Texas Keystone Inc. & Ors v. Psari Holdings Limited & Ors and Arkin v. Borchard Lines Ltd. & Ors. See also US case Abu-Ghazaleh v. Chaul). Is this a trend to observe in the near future?
Another topic raises the eyebrows in relation to the consequences of the existence of a third party funder: for the purposes of deciding security for costs, must a funded party be presumed impecunious merely because the funding flows from a third party? To the best of my knowledge, no arbitral tribunal has yet decided according to such assumption. To the contrary, in the case cited above (Eurogas v Slovakia) the arbitral tribunal expressly denied such assumption. However, Gavan Griffit’s assenting reasons to the decision on St. Lucia’s Request for Security for Costs of 13 August 2014 (RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10) gave room to serious concerns and no less criticism. His words deserve nothing less of a serious thinking and a peaceful discussion:
“once it appears that there is third party funding of an investor’s claims, the onus is cast on the claimant to disclose all relevant factors and to make a case why security for costs orders should not be made”
This is indeed a topic full of questions and with only few clear answers. Nevertheless, the following seems to me clearer.
My first reaction when confronted with TPF for the very first time was: this topic defies the principles of the fundamental right to access Justice. In fact, let us think of a party in financial distress, incapable of supporting the costs of a legal action or of arbitration proceedings. Why upbraid a party (or its counsel) seeking financial support from a funding institution? Why reproach the funder? Is it not in the best interest of every party to have effective access to Justice even if by recourse to a funding system? Don’t those institutions perform a role of social and public interest by allowing an impoverished party to have an effective defense of its rights? It is true that sometimes third party funders may bring unbalance between the parties, but isn’t it also true that they may perform a role of leveling the playing field?
One cannot deny this.
Having this in mind, I believe that the equation stated above may not be accurate. The issue may not be whether this is “usual business” or a “game-changer” simply because third party funders may be both, and may be neither.
The issue should be an assessment of the real role they can play concerning the social and economic public interests involved when funding a legal activity, on one hand, and the close attentiveness to that funding activity that ethical and deontological concerns require, on the other.
Further, reality check is needed, and commentary and other studies concerning third party funder need more fact-finding than just the traditional “anecdotal evidence”.
While I do not question that arbitrators and counsels – at least the large majority of them – will tackle (and some have already done so) these ethical and deontological concerns by full disclosure and by maintaining full independence from third party funders, and while I do not question either that most funders will (and actually do) refrain from intervening, horror stories are not needed to prove the rule by the exception. And those exceptions require future care.
* Duarte G. Henriques, Rua Fialho de Almeida – 32 – 1 E, 1070-129 Lisbon • Portugal, dghenriques@bch.pt, www.bch.pt.