Disclosure Of Third Party Funder In International Arbitration: An Area To Be Regulated

( This is authored by Advait Helekar and Monica Bagwe of ILS Law College, Pune. )

Introduction

Third Party Funding (TPF) is an industry whereby prospective investors finance legal claims in exchange for influence and control over case management and a contingency in the recovery. Due to the high amount in dispute as compared to the legal costs of sustaining the claim, many investors agree to partake in the legal costs to recover the award at a future date. TPF has evolved from the principles of champerty and maintenance. Section 13 of the Criminal Law Act 1967 abolished the offence and tort of maintenance and champerty in the United Kingdom. The law on maintenance and champerty arose as a matter of public policy. Subsequent judgments have held that the law on maintenance varies with the question of public policy and is not a fixed and immutable matter.[i] It is a question that must be alterable with the passage of time. As public policy changes, so should the law on maintenance and champerty change.

No prevailing arbitral laws or rules require a party to disclose how it finances its claim or defence.[ii] Furthermore, parties to an arbitration proceeding are under no duty to disclose their funds in good faith or as ‘a matter of fairness.’[iii] However, in view of the international application, the parties should be obliged to disclose the presence of a third party funder.

Arguments In Favour Of Disclosure Of Third Party Funder

Parties opt for arbitration rather than submitting to the jurisdiction of domestic courts because they are skeptical about the partial and biased conduct of judges of such courts towards parties belonging to their own nation. However, this reason for opting for an arbitral proceeding gets frustrated when the discovery of any relation or connection of one of the arbitrators with the third-party funder during the course of an arbitration proceeding (as opposed to a disclosure by the arbitrator at the commencement of the arbitration itself) is made. This would give rise to concerns over conflict of interest and necessitate either fresh proceedings or replacement of such arbitrators. Furthermore, raising doubts regarding the impartiality of the tribunal after the award is rendered would be more detrimental, as any such doubts could lead to the award being challenged.

In Sino Dragon Trading v. Noble Resources, concerns regarding the impartiality of arbitrators were raised. It was contended that two of the three arbitrators were not independent and impartial as they worked for an Australian law firm that had previously acted for a company associated with Noble Resources. Thus, a party challenged the arbitrators alleging ‘justifiable doubts as to their impartiality or independence’ and applied to the Australian Federal Court to adjudicate on the challenge under Art. 13(3) of the UNCITRAL Model Law. Furthermore, in Fleetwood Wanderers Limited v. AFC Flyde Limited, Mr. Craig Moore, the sole arbitrator had contacted one of the parties independently without notifying the parties. Consequently, a challenge to an award under Section 68(2) (b) of the English Arbitration Act, 1996 was allowed by the London Commercial Court as a result of the arbitrator’s failure to comply with his duties to ‘act fairly and impartially’ under Section 33 of the English Arbitration Act, 1996. Under the Indian domestic law, according to Section 48 of the Arbitration and Conciliation Act 1996, non-enforcement of a foreign award is permissible at the request of a party against whom it is invoked. However, the party must sufficiently prove the award to be contrary to public policy. The Act has gone on to define award in conflict with the public policy of India as one, wherein rendering of the award was induced by fraud or corruption. Hence, the arbitration proceedings may get frustrated by the presence of an unknown TPF.

In order to prevent the occurrence of conflict of interest, which would be followed by the disruption of the arbitral proceedings and non-enforcement of claims,[iv] tribunals should be well informed about the existence of a TPF agreement. To this effect, various arbitration institutions such as SIAC have mandated the disclosure of TPF through their rules. The IBA Guidelines dictate a party to disclose its source of funding, such disclosure being construed as an affirmative duty. However, a majority of arbitrations still do not consider disclosure of the third parties mandatory. Nevertheless, transparent and upfront disclosure of a TPF arrangement is the primary step towards ensuring the efficiency and integrity of the arbitral system.[v]

Arguments Against Disclosure Of Third Party Funder

A leading argument against disclosure of a third party funder would be that funding agreements are fundamentally private and beyond the reach of regulations.[vi] As an arbitration agreement governs the disputes between the parties, the tribunal has jurisdiction only over the parties to that arbitration agreement. Thus, on the grounds of jurisdiction alone, the regulation for disclosure is a serious problem.

Another concern would be that requiring disclosure may increase procedural delays. Such opponents argue that the respondents might engage in frivolous legal battles in order to increase the cost for the funded claimant. In Jean – Christophe Hon let's view, “if a party becomes aware of the other party’s litigation budget, an incentive might be created to bring dilatory requests or arguments simply to exhaust that budget before the case is over.”[vii] Furthermore, scholars like Filho believe that 'guerilla tactics' could help in distracting from the ultimate issue with the respondents trying to maximize their procrastinating manoeuvers.[viii]

Failure to satisfy the tests of relevance is another ground for the courts to refuse to order such disclosure and also that it may not affect the proceedings. As per the federal court in New York, the funding agreement is discoverable only when it is directly at issue in the case.[ix] In Space Data Corp’s case, the court denied the defendants’ motion to compel the discovery of a TPF in litigation. The motion was dismissed due to the defendants' failure to establish how the requested materials were “relevant to any party’s claim” or “proportional to the needs of the case.”

The defence of privilege invoked by the claimant serves as an obstacle in the mandatory disclosure of TPF. Such defence is an exception to an order or request for disclosure of documents or production of other evidence related to the TPF.[x] Furthermore, disclosure of the existence of a litigation funder is a precondition for document production requests. Also, it is essential that the requesting parties satisfy the tests of specificity, relevance, and materiality that govern the production of information adverse to the funded party’s interests.[xi]

The contents of a third party funding agreement and the other funding related documents include privileged documents and legal advice. Documents such as the statement of claim, counterclaims, etc. prepared in anticipation of litigation are a part of the funding arrangement. However, such documents are under the protection of the work-product privilege. Nevertheless, they are also protected by the attorney-client privilege under the common interest doctrine, wherein ‘a common interest in a litigation strategy’ is shared between the parties.[xii] Furthermore in the case of Devon IT,[xiii] it was observed that the production of documents would reveal various confidential litigation strategies, including matters regarding the merits of claims and defence as well as damages, resulting in grave prejudice to the funded party. In light of protecting the funded party’s interest, such party must be obliged to disclose the presence and identity of the funder rather than disclosing the contents of the funding arrangement.

However, it can be contended by the respondent that privilege is not a perfect defence to an order for disclosure of the funder. Notably, the same case[xiv] held that common interest doctrine is an exception to the attorney- client privilege. Further, the attorney and client privilege will be considered to be waived off upon the disclosure of the privileged materials to a third party.[xv] However, in the presence of a non-disclosure agreement between the funder and the funded party the question of privilege being waived off does not stand. Similarly, the defense that the tribunal does not have the jurisdiction to order the disclosure of the TPF agreement cannot be raised as the order is made to the parties to the arbitration and not to the Third-party Funder. Furthermore, the issue of relevance and materiality does not arise as the parties to the arbitration, at the time of entering the arbitration have consented to the arbitration proceedings itself; They are bound by the Arbitrator’s decision on this matter.

Hence, while acknowledging the doctrine of privilege, the claimant could be ordered to merely disclose the identity of the third-party funder and not the funding agreement per say. Ordering disclosure of the funding arrangement which contains confidential and sensitive information would hamper the claimant’s interest, but the disclosure of the third-party funder per se could hardly give rise to such concerns.

Conclusion

Various tribunals/institutions have attempted to reach a mutually acceptable scenario by acknowledging both the respondent’s concern regarding conflict of interest and the claimant’s concern with respect to privilege. ICSID has proposed certain changes to its rules with regard to TPF. The disclosure language of the proposed amendment on the third-party funding in its Institution Rules& Arbitration Rules reads as follows,

1. A party shall file a written notice disclosing the name of any non-party from which the party, its affiliate or its representative has received funds for the conciliation through a donation or grant, or in return for remuneration dependent on the outcome of the dispute (“third-party funding”). Such notice shall be sent to the Secretariat immediately upon registration of the Request for arbitration, or upon concluding a third-party funding arrangement after registration.

2. Each party shall have a continuing obligation to disclose any changes to the information as referred above occurring after the initial disclosure, including termination of the funding arrangement.

Certainly, there are benefits to this rule. Firstly, it makes disclosure of TPF mandatory and thus reduces the uncertainty about whether TPF at all will play a role in arbitral proceedings. Secondly, it endorses transparency, thereby safeguarding the investment arbitration regime against persistent speculation about who is controlling and funding arbitrations. With ICSID’s attempt to reach a middle ground wherein, not only are the disputes resolved expeditiously but even the concerns of the funded parties regarding privilege are safeguarded, the party will be obliged to disclose the identity of the funder and not the funding agreement or related documents per say.

In addition to the arbitral institutions, the decisions by various tribunals have attempted to evolve the jurisprudence relating to disclosure of TPF. Such tribunals have differed on whether disclosure of the TPF is relevant and whether it should be ordered. Therefore, while balancing the concerns of the parties for the protection of their privacy as addressed in Para C, an equitable solution would be to mandate the disclosure of the presence and identity of the funder to prevent prolonged litigation and loss of time as well as money to both the parties. The same should correspondingly be implemented in all the institutional arbitration rules and in general practice.

[i] Martell v. Consett Iron Company Limited (1954) Ch 363. [ii] Bertrand, Third Party Funders (TPF) in Arbitration, 29 ASA Bull. 607, 607-610 (2011) [iii] Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, 35 Int’l Arb. Law Library 126, 125-162 (Kluwer Law International, 2016). [iv] Jennifer A. Trusz, Full Disclosure? Conflicts of Interest Arising from Third-Party Funding in International Commercial Arbitration 1679 (2013) [v] B.M. Cremades Román, Jr, Third Party Litigation Funding: Investing in Arbitration, Vol. 2012 Issue 13; Spain Arbitration Review 2012 at 142. [vi] Valentina Frignati, Ethical Implications of Third-Party Funding in International Arbitration, 32 Arb. Int’l 505, 506 (2016). [vii] Jean-Christophe Honlet, Recent Decisions in Third-Party Funding in Investment Arbitration, 30 ICSID Rev. 699, 711 (2015). [viii] Napoleão Casado Filho, The Duty of Disclosure and Conflicts of Interest of TPF in Arbitration, Kluwer Arb. Blog (Dec. 23, 2017). [ix] Kaplan v. S.A.C. Capital Advisors, L.P., No. 12-CV-9350 (VM)(KNF), 2015 U.S. Dist. LEXIS 135031, at *16-17 (S.D.N.Y. Sept. 10, 2015) [x] Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, 35 Int’l Arb. Law Library 163, 163 (Kluwer Law International, 2016). [xi] Id. at 164, 171, 172. [xii] Id. at 185. [xiii] Devon IT, Inc. v. IBM Corp., United States District Court for the Eastern District of Pennsylvania, Civil Action No. 10–2899, 2012 WL 4748160, (E.D. Pa., Sept. 27, 2012). [xiv] Id. at 176. [xv] Id.