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Article: December 2017: International Arbitration Update

Business Litigation Reports

Recent Developments in Third-Party Funding in International Arbitration. In recent years, reliance on third-party funding in arbitration has increased. Third-party funding raises two primary issues, which are intertwined: (1) should the existence of such funding be disclosed to the arbitrator(s) and the opposing party; and (2) should its existence require the funded party to provide security for costs? The rationale for disclosure is to allow arbitrators to check for conflicts of interest. However, an opposing party may use the disclosure to argue that security for costs is necessary because third-party funding could imply that a party lacks funds to pay for its own arbitration.

These issues were recently discussed in the international arbitration community through the Draft Report for Public Discussion of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration (“Draft Report”). The Draft Report was open to public comment between September 1 and October 31, 2017, and a final version incorporating public comments is forthcoming in April 2018.

The Draft Report notes that, on the issue of disclosure, no arbitral institutions have expressly required disclosure of third-party funding as a matter of course. Rather, arbitrators generally have discretion as to whether to require disclosure on a case-by-case basis. However, laws recently passed by Hong Kong and Singapore require such disclosure in locally seated arbitrations. In both jurisdictions, the laws require a party to disclose the existence of third-party funding and the name of the funder. Similarly, in arbitrations outside of Hong Kong and Singapore in which the arbitrators have required disclosure of third-party funding, parties generally have only had to disclose the identity of the third-party funder, not the terms of the funding arrangement or the reasons for the funding.

On the issue of security for costs, the general consensus in arbitral case law is that the use of third-party funding alone is not sufficient to grant security for costs. Rather, an opposing party would also have to establish bad faith or abuse. A recent decision supporting this trend is Eskosol S.P.A. in Liquidazione v. Italian Republic, ICSID Case No. ARB/15/50), Procedural Order No. 3 (June 12, 2017). In Eskosol, the arbitral panel denied security for costs against a party with a third-party funder, even though the party had been declared insolvent and placed under receivership, noting: “The Tribunal is of the view that financial difficulties and third-party funding—which has become a common practice—do not necessarily constitute per se exceptional circumstances justifying that the Respondent be granted an order of security for costs.”

Overall, third-party funding has gained acceptance in the international arbitration community; however, the community continues to discuss and work out how precisely to deal with it. At this time, international arbitration practitioners should be prepared that they may be required to disclose the existence of third-party funding and the name of the funder, given that arbitrators generally have discretion to require such disclosures. In addition, although the existence of third-party funding in and of itself likely will not cause a panel to require security for costs, practitioners representing parties that have third-party funders should be prepared to face requests by opposing parties for security for costs.