Whatever happened to third-party funding in international arbitration?

Whatever happened to third-party funding in international arbitration?

It was going to be ‘the climate change in international arbitration’.  Academics, task forces, governments and international organisations agonised over its implications.  With third-party funding (tpf) becoming normalised, with funders leaving the market and new funders arriving while others deal with the kinds of scrutiny and pressures which other businesses do, and with muted responses from arbitral institutions, James Clanchy of the Lexis PSL Arbitration team asks what all the fuss was about.

Funders have been in the news in recent weeks, not because of fears that they are conquering and transforming the landscape of international arbitration but for commercial reasons connected with their financial performance and management.  There have been new calls for regulation, not of funders’ behaviour in their customers’ arbitrations, but of their accounting practices and reporting.

Meanwhile law firms have been entering into new kinds of long-term portfolio arrangements with funders, building relationships with them as they would do with their banks and with professional advisers.  Images of funders as ‘mercantile adventurers’, gamblers, vultures and ‘hit and run’ drivers were always caricatures and are rapidly evaporating.  Funders have become respected and active members of the international arbitration community in the way that insurers had been for decades.

Institutions have largely taken their time to respond to tpf.  They have shown themselves to be circumspect.  Only a few have changed their arbitration rules and have adopted regulations of the kind that had been urged upon them in some quarters. 

At the LCIA’s annual joint seminar with the London Branch of the Chartered Institute of Arbitrators on 12 September 2019, Jackie van Haersolte-van Hof, the LCIA’s Director General, disclosed that the LCIA was not planning to introduce any new rules about tpf in its current round of revisions. 

It is worth examining how tpf turned from hot topic of the moment five or six years ago to a damp squib now. 

Who are third-party funders?

The first question to address is who third-party funders are. 

The funding of the costs of bringing or defending a claim in arbitration is nothing new.  It has been the business, or part of the business, of insurers, including legal expenses insurers and liability insurers, since the nineteenth century.  See my LexisNexis Blog post from May 2016: Third Party Funding in Arbitration – the first 125 years .

To the surprise of insurers and of lawyers who work on arbitrations funded by insurers, the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration (the Task Force), which did not have any insurers in its membership, took the decision to include insurance in its definitions of tpf for the purposes of regulations which it recommended in its report published in April 2018.  It was news to insurers that they were in the tpf business and that their involvement in arbitrations was therefore in need of regulation. 

When ICSID embarked on its rules revisions, it initially adopted, for its definition of tpf in its August 2018 draft, much of the wording which the Task Force had proposed, including ‘premium’, indicating that insurers would be caught alongside the modern tpf providers.   However, ICSID subsequently abandoned the Task Force’s wording and its August 2019 draft has a simple formulation more closely aligned with definitions of tpf in investment treaties, capturing the types of funding which are of particular concern to states, i.e. funding by providers whose remuneration is dependent on the outcome of the case and ‘pro bono’ funding. 

In investor-state arbitration, with its transparency and public policy considerations, this definition is understandable, as is the associated obligation to disclose the existence of tpf.

Commercial arbitration institutions, on the other hand, have been less ready to target tpf in this way. 

The Stockholm Chamber of Commerce (SCC) issued a policy on 19 September 2019, under which parties are encouraged (no more than that) to divulge the identity of any third parties with a significant interest in the outcome of the dispute.  Modern tpf providers fall into this category but so do other parties, such as parent companies and ultimate beneficial owners.  Insurers, who fund cases but whose financial interest usually lies in not being obliged to do so, are not mentioned in the SCC’s policy but liability insurers, who take on the burden of defending claims, may be caught as ‘persons obligated to pay an award under an indemnification or other agreement’. 

At the seminar in London on 12 September 2019, mentioned above, the LCIA shared the panel with experts in liability and legal expenses insurance in the shipping industry (P&I and FDD clubs).  The clear message was that the modern tpf providers had to be put in context.  They were not providing anything particularly new or shocking.  Their financial model was different but it was also evolving and adaptable.  Against this background, blanket regulation wasn’t appropriate.

Putting champerty back in its box

During the debates about tpf, practitioners unfamiliar with the longstanding practice of funding by insurers had expressed concerns that the new tpf providers would take control of arbitrations.  This was said to be a reason why they needed to be regulated. 

The medieval English doctrine of champerty had raised its head.  But insurers have been exercising control over claims and defences in arbitrations for decades.  Their experience has helped arbitration to prosper.  It was a recognition that insurance was beneficial in civil litigation which had led to the erosion of maintenance and champerty in England.

In the middle of the tpf debate came the decisions in the Excalibur  litigation in the English courts, which criticised the funders in that case, not for controlling the claim but for failing to assess and monitor it adequately.  Those decisions had implications for funders in international arbitration: it was in the interests of justice that they should conduct rigorous and ongoing reviews of cases which they funded.  See my LexisNexis Blog post: Rigorous steps short of champerty – the Excalibur standard for control by funders

Conclusion: cool heads prevail

The dust has not yet settled on the tpf debate.  However, the pragmatic and considered approaches taken by ICSID, the SCC and the LCIA may indicate that cool heads are prevailing. 

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About the author:

James is an arbitration specialist. He has more than 25 years’ experience of ad hoc, trade association, institutional and investment arbitrations as a solicitor in London and Paris, as a former Registrar of the London Court of International Arbitration (LCIA), and as a case assessor for legal costs insurers and third party funders. His background as a lawyer is in international trade, commodities, shipping and insurance.

He trained at Withers in London and then spent four years in the firm’s Paris office. He was admitted as an avocat at the Paris bar (1994 – 2008). Returning to London, he spent more than 13 years at Holman Fenwick Willan in its Trade & Energy group. As Registrar and Deputy Director General of the LCIA in 2008 – 2012, he oversaw the administration of more than a thousand commercial arbitrations and assisted with a review of its Arbitration Rules. He subsequently spent two years at Thomas Miller Legal, assessing and managing a wide range of commercial and investment claims on behalf of insurers and funders. Returning to private practice in 2015, he spent a year in Stephenson Harwood’s International Arbitration group where he assisted on ICC and LCIA arbitrations, principally oil and gas disputes.

James is a Fellow of the Chartered Institute of Arbitrators. At LexisNexis, James works on the Lexis®PSL Arbitration module.