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Article: December 2015: International Arbitration Update

December 01, 2015
Business Litigation Reports

Increasing Trend of Requiring Disclosure of Litigation Funding Agreements in International Arbitration. Third-party funding of litigation is a fast- growing industry, and funders have become increasingly active in funding international arbitration claims. This financing has been around for several years, but as it matures, litigants are pursuing disclosure of such third- party funding agreements. Parties contemplating third-party funding in the international arbitration context should be aware of recent decisions imposing disclosure obligations of such financing arrangements. A recent decision by an ICSID panel, and the ICC’s Dossier X: Third-party Funding In  International Arbitration, has required or advocated for disclosure of third-party funding agreements to the funded party’s adversary and the arbitration panel.

In U.S. litigation, parties considering third-party funding typically enter into non-disclosure agreements with prospective or  actual funders and view their communications,  negotiations, and agreements with litigation funders as immune from discovery. The limited case law addressing this issue tends to support the argument that information shared with litigation funders is protected from disclosure pursuant to the attorney work-product doctrine.

To get a funder to supply financing on favorable terms, the claim holder (typically through its attorney(s)) often must convince the funder of the merits of the case. Such negotiations may involve disclosure of the “lawyers’  mental impressions, theories and strategies about” the case, which constitute work product under the Federal Rules of Civil Procedure.  Similarly, the terms of a funding agreement—such as the financing premium or acceptable settlement conditions—often reflect attorney analysis of the merits of the case.

U.S.  courts  generally hold  that  work  product protection is waived by disclosure  to a third-party only when that disclosure substantially increases the opportunities for adversaries or potential adversaries to obtain the information, and/or where a party has not taken reasonable steps to preserve the confidentiality of the information. Thus, where documents are shared with third-party funders subject to confidentiality or non-disclosure agreements, courts generally agree that work product protection  is not waived.

In stark contrast to  the  disclosure protections afforded to third-party funding arrangements in U.S. litigation, in international arbitration some degree of disclosure of third-party funding agreements may become the rule rather than the exception. There are two significant reasons for this.

Avoidance of Conflicts of Interest and Preservation of Arbitrator Independence. Private arbitrators, unlike judges or juries, often are senior partners or counsel at large international law firms that frequently do business with litigation funders. It is possible, for example, that an attorney acting as a neutral arbitrator in one case— in which one of the parties’ claims are being financed by a funder—may be representing a separate party in a separate case in which his fees are being paid by that same funder. Thus, absent disclosure of the identity of the funder at the outset, conflicts of interest may exist or arise that compromise (at least the perception, if not the reality, of) the arbitrator’s independence. If such conflicts are revealed only later in the arbitration, the legitimate constitution of the panel and its integrity may be placed in doubt and subject to challenge in the arbitration when the information is revealed, or in a subsequent collateral attack, such as in a motion to vacate or set aside the award (or seek its annulment in the ICSID context). This concern likely played a role in the International Bar Association’s decision to revise Guidelines on Conflicts of Interest to include third- party funders as entities to be considered part of the same legal entity as the funded party to the dispute.

Payment of Costs Awards. Although an award of costs can be seen in both U.S. litigation and international arbitration, such “costs” are often nominal in U.S. litigation, but substantial in international arbitration where the “costs” can include attorneys’  and experts fees as well as the fees of the arbitrators and can thus amount to millions of dollars. A party relying on a third-party funder to pay the cost of pursuing claims may not be able to pay a costs award if it loses, and if the agreement with the funder does not require the funder to pay a costs award, the adversary may be left empty handed.

These considerations  led the ICSID tribunal in Muhammet Çap & Sehil Inşaat EndustriveTicaret Ltd. Sti. v. Turkmenistan (ICSID Case No. ARB/12/6), to issue a sweeping procedural order requiring the Claimant to disclose: (1) whether its claims were funded by a third- party funder, (2) the identity and “details” of the funder, (3) 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.” The panel determined that these disclosures  were necessary  to protect the integrity of the proceedings by avoiding potential conflicts of interest, for transparency, and to address “Respondent’s concern that if it is successful in this arbitration and a costs order is made in its favour, Claimants  will be unable to meet these costs and the third-party funder will have disappeared  as it is not a party to this arbitration.”

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Funded parties that are concerned that agreements or information shared with third-party funders may be disclosed to their adversaries and/or the tribunal may take preemptive  measures to avoid the need for disclosure. If conflicts of interest are a concern, for example, a party may disclose at the outset that its claims are being funded by a third-party and identify the third-party, without disclosing the funding agreement itself. If the ability to pay a costs award is the concern, the party may offer to post security for costs and/or represent (if true) that the funding agreement obligates the third-party to cover an award of costs.

In sum, parties to international arbitration— particularly those used to  the  protection of work product  under  the  U.S.  disclosure rules—should be mindful of the increasing  trend in international arbitration to require disclosure of third-party funding relationships.  Although some preemptive measures may be taken to avoid disclosure of information that has particular strategic value, parties should be cautious in sharing information with funders and in structuring funding agreements, mindful of the possibility that an international arbitration panel may order the information and agreements be disclosed.