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How is third-party funding affecting arbitration?

by Philip McMullan on 28 Oct 2016

third-party_fundingThird-party funding has had a significant impact on litigation in recent years as corporates and law firms seek to control their risk profile while accessing capital that might otherwise be tied up for long periods.

At a recent Q&A session, organised by law firm Norton Rose Fulbright, leading players in funding set out how international arbitration is being affected by the availability of alternative funding mechanisms.

The growth of third-party funding

Asked about emerging trends, Ruth Stackpool-Moore, director of litigation funding and head of Hong Kong at Harbour Litigation Funding, explained the rapid changes she is seeing: "The past 12 months have seen further exponential growth in the use of third-party funding generally and, particularly, an increase in the number of enquiries regarding arbitrations.

"Demand for funding in investment treaty arbitrations has historically been strong but we are now also seeing an increase in demand for funding in commercial arbitrations. Increasingly, this comes from large, well-capitalised companies, which, may, in the past, have considered that funding was not for them."

These views were echoed by Steven Friel, chief investment officer at Woodsford Litigation Funding: "We are receiving more enquiries, from a wider variety of parties (including some of the biggest multinationals, seeking to hedge the risk of litigation and arbitration), and from a wider variety of jurisdictions," he commented.

"There has been a huge increase in levels of knowledge and understanding of third-party funding products among the international arbitration community over the past 12 to 18 months. International arbitration lawyers and their clients have rapidly embraced third-party funding, perhaps more so than the domestic litigation market. Particularly in high-value international arbitrations - for example, ICSID claims - I would be very surprised to learn of any claimant that had not actively considered funding."

A valid option for the future

The panel were keen to allay fears that parties risk waiving privilege and confidentiality when discussing their case with a third-party funder. 

Mr Friel said that while there are some uncertainties, the legal position in most jurisdictions, and the dominant view in international arbitration, is "tolerably clear: confidential communications between a litigant and a third-party funder are protected by the common interest doctrine".

He said: "As long as proper confidentiality protections are put in place at the outset, there should not be a waiver of privilege in such communications. Reputable and professional funders, particularly those of us staffed by highly skilled lawyers, and who are members of the Association of Litigation Funders, are equipped to deal with privilege issues."

Christopher Bogart, CEO of Burford Capital, put forward the view that litigation finance is evolving into corporate finance as the industry matures and organisations come under pressure to manage risk and free up capital.

"Many of the trends reflect the maturing of the industry," he said. "For example, both claimants and firms are increasingly interested in the portfolio approach to financing, where instead of seeking funding to pay fees or expenses related to a single matter, multiple matters are used as collateral to secure capital. This approach allows extraordinary flexibility: capital can be used across the portfolio of matters or even for business purposes unrelated to arbitration or litigation.

"We are seeing the evolution of litigation finance into corporate finance. As evidence of that, only 13 per cent of Burford’s commitments in 2015 were to single arbitration or litigation matters; all the rest of our capital was flowing to portfolios and complex investments. As to markets, we have clients from every populated continent and strong demand globally."

While third-party funding for arbitrations is not available across all jurisdictions, the panel were confident that this is changing fast, with most international dispute resolution centres making moves to allow the approach.

"Hong Kong and Singapore immediately come to mind as examples of jurisdictions slowly opening the door to third-party funding in arbitration," said Ruth Stackpool-Moore. "Singapore recently published two draft bills for consultation which, once enacted, will legalise the use of funding in international arbitration there. Hong Kong – arguably currently more open to funding in arbitration than Singapore – is expected to introduce new legislation in the next 6 to 12 months."

The panel were united in what litigation funders look for when deciding to support a claim.

They will support parties with a strong case on the merits, with an experienced legal team and a solvent defendant. Costs should also be proportionate to the potential recovery with the matter heard before a tribunal where the governing law and jurisdiction afford relative certainty.

All the evidence suggests that third party funding looks set to become much more prevalent in international arbitration. The recent UK case of Essar Oilfields Services Limited v Norscot Rig Management Pvt Limited saw the High Court uphold an arbitrator’s award of £2 million in funding costs – the impact of that decision will be covered in the next JAMS International blog post.

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Topics: International Arbitration, Arbitration

Philip McMullan

Written by Philip McMullan