Rise of third party funding: a growing international consensus

Whatever your opinion on the ethical implications of third party funding in international arbitration, the past six months have seen two firm nods in its favour. These have signaled that, as a method of financing arbitration, it is here to stay.

In the landmark case of Essar Oilfields Services Ltd v Norscot Management Pvt Ltd, the English High Court stated that it was within an arbitral tribunal’s discretion to award a claimant itscosts of third-party funding, including the uplift payable by the claimant in the event of success. The court agreed with the arbitrator’s reading of the phrase “legal and other costs” as setting a functional test to the costs recoverable in an arbitration: “do the costs relate to the arbitration and are they for the purposes of it?”.

Why is this decision notable? For two reasons:

First, the High Court did not follow the recommendations of the November 2015 report of the ICCA-QMUL Task Force on Third Party Funding. That report categorically concluded that:

“It is not appropriate for tribunals to award funding costs (such as a conditional fee, ATE-premium, or litigation funder’s return), as they are not procedural costs incurred for the purpose of an arbitration. The success portion payable to a third-party funder results from a trade-off between the funded party and the funder, where the funder assumes the cost and risk of financing the proceedings and receives a reward if the case is won. This agreement is not linked to the arbitration proceedings as such.”

Second, if the recoverable costs include any costs that have been incurred by reason of participating in the arbitration, that would appear to allow an arbitral tribunal to include other sums within an award of costs, including success fees under damages-based agreements (DBAs) and after the event (ATE) insurance premiums. Of course, in respect of English court litigation, whilst conditional fees and the premium for additional ATE insurance were declared recoverable under the British Courts and Legal Services Act as amended by the Access to Justice Act 1999, this changed with the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), which abolished the recoverability of ATE insurance premiums and conditional fees for agreements entered into after 1 April 2013.

Following the decision in Essar, arbitration appears to have a distinct costs advantage over English court litigation and, with the precedent established in the case (albeit that such costs may be recoverable), one would expect to see more parties applying for such costs in London-seated arbitrations.

A second significant development in relation to third party funding is the willingness of major arbitral centres such as Singapore and Hong Kong to reconsider their strict laws against champerty that have made third party funding agreements illegal to date.

Following consultation in 2015, the Hong Kong Law Reform Commission released a report in October 2016 in which it recommended that third party funding of arbitration should be allowed for arbitrations seated in Hong Kong, and also for services provided in Hong Kong for arbitrations taking place outside Hong Kong. On 30 December 2016, the Hong Kong government gazetted the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 and introduced it into the Legislative Council.

On 10 January 2017, Singapore went one step further: the Singapore Parliament passed amendments to the Civil Law Act legalising third party funding in international commercial arbitration and related proceedings in Singapore. Such a move will clearly open up a significant new market for third party funders.

A volte-face by both centres is evidently a recognition that in relation to international arbitration (though not litigation), a continued bar on third party funding may limit their appeal as global arbitral centres. The underlying message is clear: not only is third party funding here to stay, but it is only going to continue to increase in popularity as a means of financing disputes.

So what does this mean for the international arbitration landscape? The criticism regarding third party funding in private arbitration, with its various ethical and procedural issues, is not going away.

2017 will no doubt be a year of expansion (of the availability and recoverability of third party funding). However, it is likely to be a year which discusses restraint, as the debate moves from whether we can accept third party funding in international arbitration to whether, and to what extent, it needs to be regulated.