Introduction
There has been an immense development in the realm of Alternate Dispute Resolution, which comes with certain new phenomena. One such phenomenon having significant traction in the field of arbitration is the concept of Third-Party Funding. It is the novel financial assistance method wherein a third-party funder will fund all the litigation expenses of either one or both parties to the dispute. Despite the challenges it has faced due to the doctrine of Maintenance and Champerty which prohibits such forms of funding, numerous jurisdictions have acknowledged the legal validity of the Third-party funding. Countries such as Hong Kong and Singapore have even regulated the TPF agreements. India, on the other hand, lacks a regulatory framework, which raises ethical and legal issues, especially concerning the independence and impartiality of arbitrators. These are the situations having the potential to dissuade the entire arbitral proceedings. There is a growing need for effective regulatory mechanisms and clear guidelines to avoid any potential conflicts of interest and preserve the integrity of arbitral proceedings, due to the presence of third-party funder.
Third-Party funding in Arbitration
Third-party funding is a financial assistance method wherein an agreement is formed between the independent third party and the adjudicating party i.e. party to the dispute, to provide financial assistance to the latter. It is a novel concept where the third party covers the litigation expenses such as lawyer’s fees, court/tribunal’s fees, cost of expert witnesses, and any other cost imposed by the court over the adjudicating party. It is also referred to as ‘Litigation Financing’. It generally involves disputes such as commercial suits, domestic or international commercial arbitrations, “class action suits,” tortious claims such as medical malpractice and personal injury claims, anti-trust proceedings, insolvency proceedings, and other similar claims having the potential of significant monetary returns. Pertinently, a major chunk of the arbitration proceedings is funded by investment banks, hedge funds, insurance companies, or pension funds. The TPF agreements are categorized as Single-case Funding and Portfolio Funding, in which the former covers only one claim or action whereas the later covers multiple claims.
Third – Party Funding : Walking a thin line?
In multitudinous jurisdictions, TPF agreements were corroborated with illegality due to their inconsistency with the legal doctrine of Maintenance and Champerty. Precisely, this doctrine forbids the third party to fund any unconnected party to the dispute. However, at present many jurisdictions such as Hongkong and Singapore have already done away with this antiquated doctrine and TPF agreements have now become a growing phenomenon over the past three years in both the field of litigation and international arbitration. As per the survey conducted by Queen Mary University of London in 2018, 37% of respondents said that they had used third-party funding in International Arbitration. The top countries worldwide that relate to the volume and sophistication of third-party funding arrangements include Australia, the United Kingdom, the United States, and Germany. Many countries have even regulated the TPF Agreements such as Hong Kong and Singapore. Hong Kong has come up with an amendment in the Arbitration Ordinance on 1st February 2019 permitting third-party funding in the country attaching certain conditions to it. Also, Singapore through Civil Law (Third Party Funding) Regulations, 2017 has permitted funding by the Third Party for international arbitration and related cases.
In the Indian context, there has been an immense development in the Commercial Dispute Resolution Landscape. But unlike other countries, India lacks any regulatory framework and guidelines on TPF in either litigation or arbitration creating a hazy picture. Recently, the Delhi High Court in Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. and Ors., while acknowledging the importance of third-party funding to commercial dispute resolution alluded to the need for appropriate regulation on third-party funding. The Court further remarked that it is important to maintain transparency and make sure that it should not be exploitative. Therefore, even though it is legal in India it lacks any regulatory mechanism, which may lead to many ethical and legal issues such as evidentiary privileges, confidentiality issues, and the backbone of any Arbitration proceeding i.e. independence of the Arbitrator.
Navigating ethical waters : Preserving impartiality and independence of Arbitrator
The appointment of an arbitrator is one of the crucial steps in the Arbitration process. It is the arbitrator’s independence and impartiality which determines the efficacy of whole arbitration proceedings. Section 12 of the Arbitration and Conciliation Act, 1996 states that the arbitrators have to maintain independence and impartiality throughout the Arbitration proceedings. The standard approach regarding the same is that there should not be any justifiable doubt or apprehension of bias in the minds of the party involved in the Arbitration process. The importance of this rule was rightly elucidated in the case of Metropolitan Properties Co (FGC) Ltd v Lannon, wherein it was held that “Justice must be rooted in confidence: and confidence is destroyed when right-minded people go away thinking: ‘The judge was biased.” Unregulated Third-party funding can indubitably harm the independence and impartiality of the Arbitrators. As rightly stated, “Impartiality refers to the state of mind of the arbitrator, whereas independence looks at the arbitrator’s relationship with other parties, including a third-party funding corporation that provides financing to one of the parties in arbitration.” Some of the situations of potential conflicts of interest are:
Repeated Appointments of an Arbitrator by the Same Funder
These potential conflicts of interest can arise where there is repeated appointment of an arbitrator in the cases funded by the same third-party funder. There can also be a situation where one party involves an individual as an arbitrator in one case, and the same individual (i.e. arbitrator) is also the counsel in some other case, funded by that same third party. The arbitrator who was also the counsel in the second case would have received some fees from that funder and must have some connection with him. This financial arrangement can pose a serious question on the independence and impartiality of the arbitrator. The same situation was also illustrated in the case of OPIC Karimum v. Bolivarian Republic of Venezuela, wherein the same arbitrator has been appointed for the past three decades. The Court, in this case, opined that “multiple appointments of an arbitrator by a party or its counsel constitute a consideration that can dissuade the independence and impartiality of the arbitrator”. Further, in the case of Tidewater v. Venezuela wherein the same arbitrator was appointed by the same party thrice in the matter, it was noted that in this situation there can be doubt on the independence and impartiality of arbitrator as the “arbitrator’s financial benefits might create a relationship of dependence”. So, if the quantum of finance that the arbitrator gets from his repeated appointments has the potential to influence his appointment, it can lead to a probable conflict of interest.
Relation between an Arbitrator and a Third-Party Funder
There can be a situation where the person who is the legal advisor of the third-party funder will later be appointed as the arbitrator in the case being supported by that third-party funder. In this case, the third-party funder will have the “direct economic interest” and will receive some shares. This can pose a serious question of the independence and impartiality of the arbitrator.
Financial ties between Arbitrator and Third-Party Funder
Moreover, there can be a possibility of financial ties and interests between the arbitrator’s firm and the third-party funder such as the arbitrator having some shares in the funder’s company.[i] In this event, the arbitrator will be having some returns or proceeds from the third-party funder. In this situation, there are probable chances that a third-party funder will provide a certain advantage to the arbitrator to decide in their favor.
These situations can have disastrous consequences on the arbitration proceedings as parties will raise doubt on the independence and impartiality of the arbitrator at any point, necessitating the appointment of a new arbitrator and the start of the proceedings afresh. If this happens at a later stage, it can severally disrupt the whole process, even leading to the annulment of the award owing to public policy concerns.
From Secrecy to Transperancy : Disclosure of Third-Party Funder
Impartiality and independence of the arbitrator are pivotal for the whole arbitration process, “Since the success of international arbitration depends in large part on the quality and conduct of the arbitrators who hear the disputes, there is a great need for arbitrators to avoid ethical conflicts and disclose actual and potential conflicts of interest.” A pertinent solution to this inherent risk of hiding conflicts of interest from third-party funders is the disclosure of the financing arrangement between both the parties and the TPF. It can be better understood by weighing the pros and cons of disclosing the existence of a TPF relationship. However, one of the foremost criticisms that arise is that the decision of the third-party to provide funds to any adjudicating party is their private decision which they want to be confidential. Nevertheless, as mentioned above, it is not a private matter as it will also affect the other party to the dispute by deciding their future course. Consequently, this argument does not hold.
Another criticism will be that the disclosure of the third-party funder will itself influence the decision of the arbitrator as now he will know who is going to fund the proceedings. To prevent the same, this disclosure should not be done. However, this argument cannot be upheld as pointed out by Catherine Rogers that, “An absence of specific knowledge by an arbitrator is not universally recognized as negating allegations of bias, particularly when circumstances create inappropriate financial relationships from which an arbitrator has benefitted, even if unknowingly.”[ii] For example, there are numerous instances by which the arbitrator can know about the third-party funder other than the disclosure. If the third-party funder is a publicly renowned business, it might be necessary for them to disclose their involvement in the dispute. As both the arguments are negated the only logical solution to this problem will be the disclosure of third-party funding. It will certainly reduce the chances of biasness in the arbitration proceedings.
The way forward : Need for effective regulation
TPF in arbitration is a relatively naïve and growing concept as compared to other financing methods in litigation and arbitration. With various other advantages such as financing the party to defend itself, it also provides a level playing field among the parties. However, TPF also has some potential conflicts of interest such as threat to the independence and impartiality of the arbitrator having catastrophic consequences. If a situation of conflict of interest happens at any stage of the proceedings, it can lead to disqualification of the arbitrator and annulment of the award, with the start of the arbitration proceedings anew. The pertinent solution to this potential conflict of interest is the disclosure of the third-party funder. However, there has been significant progress in this regard as recently, the International Bar Association has come up with the amendment in guidelines to include TPF as a conflict of interest having devastating consequences. International Chamber of Commerce in its 2015 report has also said that the tribunal should disclose the information of third-party funding. It has issued new guidelines and added Article 11(7) which states that, “each party must promptly inform the Secretariat, the arbitral tribunal and the other parties, of the existence and identity of any non-party which has entered into an arrangement for the funding of claims or defences and under which it has an economic interest in the outcome of the arbitration”. But still as in India, there is no such guidelines issued till now. Therefore, with the emergence of this significant and exponentially growing phenomenon, there is a requirement for a more precise form of regulation with the clear provision of disclosure of third-party funder.
References
[i] Thibault De Boulle, ‘Third-Party Funding” in International Commercial Arbitration’ (2014) 71 accessed 10 March 2024
[ii] Rogers, ‘Ethics in International Arbitration’ 201 accessed 6 April 2024
Author(s)
Harshpreet Kaur
Student at RGNUL, Punjab