Third-party Funding: The latest trend in arbitration
Arbitration is a form of alternative dispute resolution that many parties in commercial transactions use to settle conflicts instead of pursuing remedies in court or litigation. While arbitration services tend to be more affordable than litigation, parties may still face certain expenses and fees that could cause them to pause when deciding to make demands.
A novel innovation for both litigation and arbitration is third-party funding. This is when an independent party, who has no claim to the matter to be arbitrated, provides the monies necessary to a party for their various costs and expenses during the proceedings. The third-party funder will receive an agreed percentage if the funded party prevails and receives an arbitral award; as arbitration becomes a more relied-upon form of dispute resolution, the opportunities for third-party arbitration such as this increase.
This article will discuss third-party arbitration funding – providing an overview and the various advantages and disadvantages of this particular type of arbitration service.
What is third-party funding?
As mentioned above, third-party funding (TPF) is when an independent third-party financially supports a party, either an individual or business entity, that wishes to pursue an arbitration proceeding. Typically, the third party (funder) will agree with the funded party (fundee) that they (funder) will take on certain financial risks regarding the fundee’s arbitration, including advisors and application fees. In addition, the funder could also invest in “after the event” insurance to mitigate both the funder and fundee’s exposure and liability for the opposing parties’ costs.
In the past, many jurisdictions, especially those under common law, forbade third-party funding, either through best practices, standards, or outright legislation. The reasoning behind this pessimistic view was that third-parties having such a financial interest may get involved with the proceedings, attempting to exert undue influence, or that they may treat such proceedings more like gambling, which in itself is illegal in many countries. Nevertheless, as legislation and dispute resolution have evolved, TPF is gaining greater acceptance and legitimacy, as discussed below.
When would third-party funding apply?
As third-party arbitration funding is basically a type of investment, not every arbitration proceeding would attract such funders. A proceeding that does not involve damages where a party is seeking an award is most likely not going to be a good TPF candidate. Furthermore, as there is no guarantee of an arbitration’s outcome, funders will closely scrutinize a claim and only support those that they are confident will result in the fundee’s favor. Having said that, they probably would only be interested in larger potential awards and cases where the counterparties are able to pay such.
- Advantages of third-party arbitration funding
The main advantage of third-party arbitration funding is, as its name implies, the funding. A party may not have the finances available to pursue a claim, so TPF is an attractive option. Even if the party has the funds available, they may want to engage in TPF to defray some of their costs and mitigate any possible cash flow issues. Furthermore, achieving TPF funding requires extensive analysis and due diligence to make their case that they are worthy of the funding. If a funder is willing to support them financially, this provides additional confidence that they have a legitimate claim.
- Disadvantages of third-party arbitration funding
There are, of course, some disadvantages to TPF. While fundees may not have to worry about up-front costs for the arbitration proceedings, they may have to invest some capital in their research and presentation to potential funders. These costs generally cannot be recovered, even if they receive funding and win their claim. Also, they will not be able to claim the entire award if they do prevail in their arbitration. There also may be issues of autonomy in that, while a funder is usually forbidden from influencing a proceeding, they may demand the right to approve a settlement to protect their investment. Furthermore, some tribunals and arbitration rules require claimants to disclose whether they receive third-party funding. In doing so, the counterparty may demand security for costs.
Current trends in third-party arbitration funding
As previously mentioned, third-party funding has gained recognition for arbitration proceedings over the years. In the UK, for example, TPF has been accepted in arbitrations seated in London since 1967, and although there are no formal TPF regulations in the UK, there is a code of conduct that acts as a professional standard. In Singapore, TPF was approved for domestic arbitrations and certain claims at the Singapore International Commercial Court. Hong Kong’s Arbitration and Mediation (Third Party Funding) Amendment Ordinance 2017 allows TPF for international mediation and arbitration, along with implementing a code for such funding.
In Thailand, there are no specific rules or legislation that directly prevent third-party funding, either for litigation or arbitration. However, the Lawyers Council Regulations on Lawyer Conduct B.E. 2529 (A.D. 1986) does prohibit lawyers from suggesting that a client may win or have a special advantage, which could be construed as an influence if an advisor suggests TPF for a client. Furthermore, the Thai Courts in the past have not viewed TPF in a good light, opening that a party who has no direct interest in a matter but wants to claim any proceeds is acting immorally and against public policy. If a funder finds themselves in a Thai court on an appeal or direct claim after an arbitral award, they may see their involvement voided. Nevertheless, as the global legal and arbitration trends move towards accepting TPF as a matter of course, Thailand may follow suit with more explicit rulings and rules in favor of third-party funding.
THAC can advise on arbitration funding
The Thailand Arbitration Center (THAC) can offer assistance if you are contemplating third-party funding in Thailand or other jurisdictions. THAC is a world-class center providing comprehensive alternative dispute resolution, including arbitration services for both domestic and cross-border proceedings. Our state-of-the-art facilities can accommodate in-person and remote hearings as well as complete administrative support. If you have questions about third-party funding or need assistance with your ADR issues at any stage, please contact THAC at [email protected] or +66 (0)2018 1615.