Title: Emergence Of Third Party Funding In Arbitration
Author’s Detail
Name: Ashutosh Gautam Course: IX Sem. B.A LLB (Hons.) College: D.S National Law University, Visakhapatnam Contact: +91-8186802463 Email id:
[email protected]
Emergence Of Third Party Funding In Arbitration
Third-party funding is a growing phenomenon with only a few years of history, which has become one of the most current and controversial issues in international arbitration. Despite its newness, third-party funding has caught the attention of both the litigation and the international arbitration communities. Many prospective parties do not fully understand what third-party funding entails or what legal parameters exist in each jurisdiction. Third-party funding is a financial arrangement in which an entity that is not a party to a particular dispute funds, partly or fully, another party's legal fees or pays an order, award, or judgment rendered against that party, or both1.When the award is in favour of the client, the third party funder is remunerated with the agreed percentage of the amount of the award and in case of vice versa, the funder loses its entire funded amount. One of the numerous issues raised by the involvement of third-party funding in international commercial arbitration proceedings is arbitrator conflict of interest due to non-disclosure of the involvement of the third-party funder in the process. The Parties Involved In Third Party Funding
Under the third party agreement, the client in a particular arbitration dispute are asked to provide extensive information about the case which may be confidential or privileged under applicable law, to the potential funder in order to assess the claim. Only after thorough analysis of the position which the parties hold in the disputes arose, the funding party determines whether to proceed with the funding or not. The agreement between the funder and the funded party may also include paying another party's attorney fees if the funded party loses the case or the decision-maker (i.e., an arbitrator or panel of arbitrators, a judge or panel of judges, or a jury) orders the funded party to pay the attorne y fees of another party 2. Generally, the entity rendering the monetary backing to the parties are mostly their attorney or law firm, an insurance company, or an outside institution like corporation, bank or other financial institutions. Some institutional funders are specialized in third party funding in 1
Maya Steinitz, Whose Claim Is This Anyway? Third-Party Litigation Funding, 95 Minn. L. Rev. 1275 -1276 (2011) 2 file:///C:/Users/admin/Desktop/Arbitration%20paper/indian%20prospective.pdf accessed on 23 rd Aug., 12:20pm 2017
order to get back their money including interest rate charged on the funds provided to the parties while for others invest in litigation or arbitration claims as part of a wider portfolio of traditional financial investments or on case by case basis. The majority of these specialized funding institutions are based in countries where the third-party funding industry is welldeveloped, such as Australia, Germany, the United Kingdom, the United States, the Netherlands, Canada, South Africa, and New Zealand, with much smaller pockets of third party funding — if any at all — in Continental Europe, Asia, Latin America, the Middle East, and Africa3. Validity Of Third Party Funding In International Arbitration
In the matter of legality for third party agreements, there are no judicial consensuses especially in relation to international arbitration in comparison to domestic arbitration despite of its international and contractual nature. eventually where the torts of maintenance and champerty which is an illegal agreement to finance a lawsuit has been watered down over time, there still exits some common law jurisdictions recognising them as civil or criminal wrong4. Depending on the seats of international arbitration, it is very important to analyse the legality of third party funding due to following reasons- firstly where the claimant being the funded party may seek for the interim measures. however if third party funding is illegal or not expressly permitted at the seat, the courts of the seat might refuse to recognise the arbitration proceedings or the respondent might make the claimant liable to be sued for the tort of champerty, if the tort is recognised under the laws of a particular jurisdiction. Secondly- if in case the arbitration proceeding is concluded, the respondent may rely upon the fact of involvement of third party to challenge that award under public policy exception.as the scope and exception of public policy varies on jurisdiction basis and, in particular jurisdictions, involvement of a third party funder can form a ground for setting aside the award5. The below analysis considers the validity TPF in some of the leading arbitration seats in the world and juxtaposes the same against the position in India.
3
Selvyn Seidel, “The Third Man” The Eur. Law. 106, pg.5 Kabir Singh, Sam Luttrell and Elan Krishna, Third -party funding and arbitration lawmaking: the race for regulation in the Asia-Pacific, Kluwer Arbitration Blog (14 July 2016) 5 file:///C:/Users/admin/Desktop/Arbitration%20paper/indian%20prospective.pdf ,pg.1 ,accessed on 25 th Aug.,1:11pm 2017 4
1. United Kingdom
Although the doctrines of maintenance and champerty originated in the UK, champertous agreements have been recognised as valid since as early as 1886. In Ram Coondoo v
ChunderMookerjee6, the Privy Council held that TPF agreements are not per se opposed to public policy. Later, the Criminal Law Act, 1967 abolished both the crimes as well torts of maintenance and champerty. Recently as well, courts have declined to question the validity of 99 TPF arrangements 7. However, the prohibition on contingency fee agreement remains in force and has, in fact, been extended to arbitration proceedings as well 8. Specifically in relation to arbitration, the House of Lords has held that given the historical development of the doctrine of champerty, it would be inappropriate to extend it to international arbitration as doing so would tantamount to extending a public justice system doctrine to the private justice system9.Thus, in so far as arbitration proceedings are concerned, the validity of third-party funding cannot be questioned in the UK. 2.
Singapore
Traditionally, TPF has been prohibited under Singaporean law. The common law doctrines of maintenance and champerty are still in force and may give rise to tortious as well as criminal liability10. In the recent case of Otech Paki stan v Clough E ngi neering11, The Singapore Court of Appeal held that the doctrine of champerty, so far it is applicable to the resolution of any legal claim, extends beyond court litigation and to international arbitration as well. The Court opined that the public policy rules must remain uniform for all forms of dispute resolution. The Court held ‘it would be artificial to differentiate between litigation and arbitration proceedings and say that champerty applies to the one because it is conducted in a public forum and not to the other because it is conducted in private ”12.This decision is in stark contrast to the position in the UK, as discussed above.
6
Ram Coondoo v Chunder Mookerjee [1876] 2 App Cas 186 London & Regional (St George's Court) Ltd v Ministry of Defence [2008] EWHC 526; Papera Traders Co Ltd v Hyundai Marine Co Ltd [2002] 2 Lloyd's Rep 692; Mansell v Robinson [2007] EWHC 101. 8 Bevan Ashford v Geoff Yeandle [1998] 3 WLR 172. 9 Giles v Thompson [1994] 1 AC 142. 10 Singapore Ministry of Law, Review of the International Arbitration Act: Proposals for Public Consultation 5 (2011); Re Vanguard Energy Pte Ltd [2015] 4 SLR 597. 11 Otech Pakistan v Clough Engineering [2007] 1 SLR (R) 989 12 Ibid . 7
However, in keeping with Singapore's reputation as one of the leading arbitration seats in the world, there have been multiple proposals to legitimise TPF. In 2011, the Singapore Ministry of Law sought public opinion on whether TPF should be permitted specifically in the context of international arbitration13.The Pubic Consultation proposed to permit TPF only in high value international commercial arbitration cases beyond the threshold value of SGD1 million. Domestic practice areas were proposed to be entirely excluded from the scope of TPF 14. The Public Consultation also provided for certain safeguards such as registration of funders, minimum eligibility criteria for funders, regime for imposition of costs/security for costs against funders, mandatory disclosure of funding agreements, etc. However, the Singapore International Arbitration Act 2012 was never amended to give effect to these suggested amendments. Recently, in July 2016, the Ministry of Law released the Civil Law (Amendment) Bill 2016 and Civil Law (Third Party Funding) Regulations 2016 15 for public consultation. The proposed Bill and Regulations seek to give legitimacy to the usage of TPF in Singaporeseated international arbitrations as well as local litigation related to such international arbitrations. The proposed changes include abolishment of the torts and criminal wrongs of champerty and maintenance16, express confirmation that deployment of TPF does not contravene the public policy of Singapore 17, and are not illegal, when used in relation to international arbitration18. Along the lines of the 2011 Public Consultation, the 2016 Public Consultation also prescribes various safeguards to prevent abuse of TPF, including mandatory disclosure, minimum qualifications and eligibility criteria for funders, etc. The Ministry's proposal was open for public consultation till 29 July 2016. The Funding Bill was introduced in Parliament on 7 November 2016, went through a second reading and passed on the same day on 10 January 2017. 3.
13
Hong Kong
Singapore Ministry of Law, Review of the International Arbitration Act Proposals for P ublic Consultation (2011). 14 Ibid . 15 Singapore Ministry of Law, Public Consultation on the Draft Civil Law (Amendment) Bill 2016 and Civil Law (Third Party Funding) Regulations 2016 (July 2016). 16 Draft Civil Law (Amendment) Bill 2016, cl. 2 . 17 Draft Civil Law (Third Party Funding) Regulations 2016, cl. 3 18 Draft Civil Law (Amendment) Bill 2016, cl. 2 .
Hong Kong's common law system has retained the doctrines of maintenance and champerty in relation to court proceedings 19. However, in Winnie Lo v 101 HK SAR 20, the Court of Final Appeal opined that the scope of these doctrines has now been diluted. It was held that given the changes in public policy considerations, several exceptions have been created which permit TPF. Such cases include insolvency litigation, cases where the third-party funder has a legitimate interest in the dispute, or where ‘access to justice considerations’ applies. Furthermore, in Cannonway Consultants v K enworth Engineering21, The High Court of Hong Kong has categorically held that the above common law doctrines do not extend to international arbitration. Relying on the English decision in Giles v Thompson, the court held that subjecting international parties to a doctrine which is not universally applicable would affect Hong Kong's at reactiveness as a venue for international arbitration. Similarly, in the recent case of Unruh v Seeberger 22, a TPF agreement in relation to a foreign seated arbitration was held as valid and enforceable. Although judicial support for TPF has been forthcoming, there is still no statutory clarification with respect to legality of TPF agreements in Hong Kong. To this end, in October 2015, the Third Party Funding for Arbitration Sub-Committee of the Law Reform Commission of Hong Kong released the Consultation Paper on Third Party Funding for Arbitration23. This Consultation Paper concluded that it is necessary to reform the Hong Kong law to expressly permit TPF for Hong Kong-seated arbitrations. 4. India
India inherited its common law traditions from the United Kingdom. However, the common law torts of maintenance and champerty have not been strictly adopted in India and a champertous agreement is not per se void24. For a champertous agreement to be held void, it
19
The Third Party Funding for Arbitration Sub-Committee of the La w Reform Commission of Hong Kong, Consultation Paper on Third Party Funding for Arbitration, Executive Summary 5 (October 2015), http://www.hkreform.gov.hk/en/docs/tpf_se.pdf . accessed on 24th Aug., 10:05am, 2017 20 Winnie Lo v 101 HKSAR (2012) 15 HKCFAR 15. 21 Cannonway Consultants Ltd v Kenworth Engineering Ltd [1995] 1 HKC 179. 22 Unruh v Seeberger (2007) 10 HKCFAR 31. 23 The Third Party Funding for Arbitration Sub-Committee of the La w Reform Commission of Hong Kong, Consultation Paper on Third Party Funding for Arbitration (October 2015), http://www.hkreform.gov.hk/en/docs/tpf_e.pdf , accessed on 24th Aug., 10:40am, 2017 24
Rattan Chand Hira Chand v Askar Nawaz Jung (Dead) By L.Rs (1991) 3 SCC 67; In re Mr ‘G’, a Senior Advocate of the Supreme Court [1955] 1 SCR 490
must be shown that it is against public policy or against justi ce, equity and good conscience25. For a funding arrangement to be opposed to justice, morality, equity or good conscience, it has to be extortionate or made for improper objects 26. Thus, even though prima facie there seems to be no prohibition on TPF, funding agreements may still be challenged for being opposed to public policy or being extortionate. Arbitration & Conciliation Act, 1996, much like other Model Law inspired arbitration law regimes, provides for the exception of ‘public policy’ under section 34 (setting aside of India-seated arbitral awards) and section 48 (enforcement of foreign awards). The 2015 amendment to the law has restricted the scope of ‘public policy’ and clarified that an award is in conflict with the public policy of India, only if,
The making of the award was induced or effected by fraud or corruption or was in violation of section 75 or section 81; or
It is in contravention with the fundamental policy of Indian law; or
It is in conflict with the most basic notions of morality or justice.
It is difficult to envisage funding agreements falling afoul of any of the aforesaid grounds. The first ground is Specifically concerned with corruption or fraud in the making of an award. The second ground, as substantiated in the case of ONGC v Western Geco
I nternational 27 , is limited to the juristic principles of natural justice, Wednesbury principle and ‘judicial approach’, ie application of judicial mind. As discussed above, the question of conflict with morality or justice will only arise if an element of unconsciousness involved. Even the erstwhile ground of patent illegality, which was part of the public policy exception for India-seated arbitrations before the 2015 amendment 28, will not be at rated as, in principle, TPF has been held as valid by the courts. Therefore, per se, TPF in arbitration does not seem to contravene India's public policy. However, given the tendency of the Indian judiciary to expand the scope of the public policy exception 29, an express carve-out in the Act would go a long way in reassuring funders and claimants alike. Through the 2015 amendment, a similar carve-out to the public policy exception has been created for clarifying
25
Ibid . In Re KL Gauba v Unknown 1954 CriLJ 1531. 27 ONGC v Western Geco International (2014) 9 SCC 263 28 Oil & Natural Gas Corporation Ltd v Saw Pipes Ltd (2003) 5 SCC 705 29 Renusagar Power Co Ltd v General Electric Co (1994) Supp 1 SCC 644; Oil & Natural Gas Corporation Ltd v Saw Pipes Ltd (2003) 5 SCC 705; Shri Lal Mahal v Proget o Grano Spa (2014) 2 SCC 433. 26
that the test of contravention of fundamental policy of Indian law shall not entail a review on the merits of the dispute30. As with other Asian common law jurisdictions such Hong Kong and Singapore, the fact that Indian law does not expressly permit TPF in international arbitration affects India's competiveness as an international arbitration centre. Given the increasing proliferation of TPF in international arbitration, the need of the hour is to supplement the laudable recent amendments to the law with an express provision permitting TPF in India-seated arbitrations and categorically abolishing any civil/criminal liability for champerty or maintenance. Existing Rules And Guidelines Related To Arbitration:Arbitration-Soft Law And Institutional Rules
Although the arbitral rules of all major international arbitration institutions require arbitrators to be independent 31, but at the same time, none of the rules define independence. Theoretically, all of the scenarios discussed above would implicate the arbitrator's independence and require disclosure under the head of circumstances which may give rise to doubts about the arbitrator's independence 32, as incorporated in the rules of all major arbitral institutions. However, as of yet, there is no express stipulation in the rules of any of the major arbitral institutions requiring a party to disclose if it is being funded33. This gap is sought to be filled by the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (the ‘IBA Guidelines’)34.The IBA Guidelines consist of two parts – (i) General Standards regarding Impartiality, Independence and Disclosure and (ii) Practical Application of the General Standards. The second part contains non-exhaustive lists of circumstances which may give rise to justifiable doubts as to independence of an 30
Explanation 2, section 34, Arbitration & Conciliation Act 1996; Explanation 2, section 48, Arbitration & Conciliation Act 1996 31 Article 11, Rules of Arbitration of the International Chamber of Commerce (January 2012); Rule 13, Rules of the Singapore International Arbitration Centre (August 2016); Article 5.3 LCIA Arbitration Rules (October 2014); Article 11, Hong Kong International Arbitration Centre Administered Arbitration Rules (November 2013); Rule 6, Arbitration Rules of the Mumbai Centre for International Arbitration (June 2016) 32 Thibault De Boulle, ‘“Third-Party Funding” in International Commercial Arbitration’, https://international-arbitration-atorney.com/wp-content/uploads/Thibault-De-BoulleThesis-On-Third-... accessed on 2nd Sep , 3:22pm, 2017. 33 Susanna Khouri et al, ‘Third party Funding in International Commercial and Treaty Arbitration – A Panacea or a Plague? A Discussion of the Risks and Benefits of Third Party Funding’, in 8(4) Transnational Dispute Management 9 (2011). 34 International Bar Association, IBA Guidelines on Conflicts of Interest in International Arbitration (October 2014), http://www.ibanet.org/Document/Default.aspx?DocumentUid=e2fe5e72-eb14-4bba-b10d-d33dafee8918 accessed on 4 th Sep.;4:14pm,2017.
arbitrator or render an arbitrator ineligible for appointment in a particular case. Specifically, this part contains three lists of mandatory disclosures – (i) ‘Non-Waivable Red List’ (items which result in disqualification of an arbitrator) 35, (ii) ‘Waivable Red List’ (items which require express consent of the parties to appoint a particular arbitrator despite the existence of circumstances listed herein)36 and (iii) ‘Orange List’ (items which give rise to justifiable doubts about the independence of an arbitrator) 37. Specifically in relation to TPF, General Principle 6 of the IBA Guidelines provides that:Third-party funders and insurers in relation to the dispute may have a direct economic interest in the award, and as such may be considered to be the equivalent of the party. For these purposes, the terms ‘third-party funder’ and ‘insurer’ refer to any person or entity that is contributing funds, or other material support to the prosecution or defence of the case and that has a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration38. In effect, the above explanation envisages disclosure of any existing relationship between the arbitrator and one of the party or a third-party funder, as listed in the Red List or the Orange List. As a result, on application of the IBA Guidelines, the arbitrators will be under an obligation to disclose their prior relationship with any third-party funder involved in the arbitration. Although the IBA Guidelines have been considered persuasive by a number of arbitral institutions, they remain soft law (absent parties' agreement to incorporate them) 39. Notably, the ICC International Court of Arbitration has adopted a Guidance Note for the disclosure of conflicts by arbitrators, which is an adaptation of the aforesaid General Principle 7 of the IBA Guidelines. The ICC Guidance Note requires arbitrators to consider, when evaluating
35
International Bar Association, IBA Guidelines on Conflicts of Interest in Int ernational Arbitration, General Standards 2(d) and 4(b) (October 2014) http://www.ibanet.org/Document/Default.aspx?DocumentUid=e2fe5e72-eb14-4bba-b10dd33dafee8918 accessed on 4 th Sep.;4:14pm,2017 36 International Bar Association, IBA Guidelines on Conflicts of Interest in International Arbitration, General Standard 4(c) (October 2014), http://www.ibanet.org/Document/Default.aspx?DocumentUid=e2fe5e72-eb144bba-b10dd33dafee8918 accessed on 4 th Sep.;4:15pm,2017 37 International Bar Association, IBA Guidelines on Conflicts of Interest in International Arbitration, General Standard 3(a) (October 2014), http://www.ibanet.org/Document/Default.aspx?DocumentUid=e2fe5e72-eb144bba-b10dd33dafee8918 accessed on 4 th Sep.,4:25pm,2017 38 International Bar Association, IBA Guidelines on Conflicts of Interest in I nternational Arbitration,Explanation to General Standard 6 (October 2014), http://www.ibanet.org/Document/Default.aspx?DocumentUid=e2fe5e72eb14-4bba-b10dd33dafee8918 accessed on 4 th Sep., 4:32pm, 2017. 39 Audley Sheppard, ‘Arbitrator Independence in ICSID Arbitration’, in International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer 136 (Christina Binder et al (eds)) (2009).
whether to make a disclosure, ‘relationships with any entity having a direct economic interest in the dispute or an obligation to indemnify a party for the award .’40 While both the IBA Guidelines and the ICC Guidance Note require arbitrators to disclose relationship with third-party funders involved in the arbitration, this obligation will only arise if the arbitrator is aware of the involvement of a third-party funder in the first place. In this relation, the IBA Guidelines require the parties to disclose ‘any relationship, direct or indirect, between the arbitrator and any person or entity with a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration ’41 While the wording of the above obligation is sufficiently broad to cover relationship between the arbitrator and third-party funders, the funded party may not be in a position to make such a disclosure as it may not always be aware if the arbitrator has had any prior relationship with the funder involved. At the same time, since the arbitrator is unaware that a third-party funder is involved, he/she will not disclose any prior or existing relationship(s) with third-party funders. Unless the fact that a third-party funder is involved is mandatorily disclosed at the outset, this catch situation cannot be resolved. The modalities of such mandatory disclosure are discussed in the next section. Mandatory Provisions Under Indian Law
Section 12 of the Arbitration and Conciliation Act of India 1996 states: 7 when a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances, such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; Explanation 1. The grounds stated in the Fifth Schedule shall guide in determining whether
circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. 40
International Court of Arbitration of the International Chamber of Commerce, Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (13 July 2016) http://www.iccwbo.org/WorkArea/DownloadAsset.aspx? id=19327366894 accessed on 4 th Sep., 10:35, 2017. 41 International Bar Association, IBA Guidelines on Conflicts of Interest in I nternational Arbitration,Explanation to General Standard 6 (October 2014), http://www.ibanet.org/Document/Default.aspx?DocumentUid=e2fe5e72eb14-4bba-b10dd33dafee8918 accessed on 6 th Sep., 1:11pm, 2017.
Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator: Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this subsection by an express agreement in writing. The Fifth Schedule of the Act incorporates the ‘Orange List’ whereas the Seventh Schedule incorporates the ‘Waivable Red List 42’. However, the Indian legislation fails to incorporate, or even make a reference to, the General Principles contained in the IBA Guidelines. General Principle 6 of the IBA Guidelines is what allows equating a third-party funder to a party to the arbitration and thus obligate the arbitrator to disclose all situations enumerated in the Red Lists and the Orange List in relation to a third-party funder. Since the Indian legislation does not incorporate this principle, it is difficult to see how arbitrators can be mandated to disclose their prior relationships with third-party funders.
42
Fifth Schedule and Seventh Schedule, Arbitration and Conciliation Act 1996 (India)
Conclusion
To conclude, various assumptions exist regarding the future of third-party funding in international commercial arbitration and most of the questions raised above remain unanswered. Third-party funding can amplify the development of international arbitration if its use is regulated in due course. In effect, it is incumbent upon the arbitrator to be aware of the presence of third-party funders in the proceedings, to make the necessary disclosures on possible conflict of interest between him/her and the funder (if any). To date there is no award which has been challenged or refused enforcement due to arbitrator conflict of interest arising from the undisclosed presence of third-party funders. Nonetheless, such a situation could paralyse the development of this new industry. Therefore, it is for the benefit of all the participants of international arbitration, and especially of the new actors, the third-party funders, to avoid any obstruction to the development of third-party funding. This is the reason why all the participants of international arbitration should collaborate in order to revise the existing arbitration laws and rules in a way to include the obligation of the parties to disclose the presence of this new player in international arbitration. It will be exciting to follow the new developments regarding third-party funding in international arbitration and its effect on arbitrator conflicts of interest. Furthermore, there is no uniform set of ethical principles applicable to international arbitration. While the IBA has made commendable efforts to bring about uniformity in this regard, parties and counsel continue to be governed by the ir respective ‘home’ rules when it comes to their professional obligations. Just as the IBA has developed special rules for conflict of interest in international arbitration, it is worth considering the merits of creating a similar special regime for third part funding in international arbitration. However, at this stage, fundamental questions regarding legality, definition and disclosure of TPF are yet to be resolved. As analysed above, the first hurdle of legality has been crossed by some jurisdictions and the others are in the process of doing so. This paper merely addresses a select few aspects of the issues presented by the TPF phenomenon. It is evident that TPF in arbitration is here to stay. A stable and predictable framework for regulation of TPF will benefit all the parties involved and it is hoped that mandatory disclosure of funding would be the first step in this direction.
