16 October 2015

Third party funding - Obligation to disclose in arbitration proceedings?

Global dispute resolution has seen a dramatic rise in the past decade in the involvement of third party funders. The rise has coincided in common law jurisdictions with the decline in the doctrines of champerty and maintenance and with widespread concerns about access to justice issues. Such access to justice concerns arise, for example, in cases where individual consumers have increasingly sought to access institutional funding for the pursuit of class or representative actions.

Issues around third party funding have generally evolved differently in international commercial arbitration, where the presence of such funding is likely to be far less transparent in the arbitration process and also less likely to be the subject of public scrutiny. Two specific concerns have been raised around third party funding in the international arbitration context: the first relates to the possible impact of such funding on the independence of arbitrators; the second relates to the fact that a party who knows the other party is supported by third party funding may well want to use that knowledge to take steps to seek security for its arbitration costs. The trend in more recent times has been towards full disclosure of third party funding arrangements.

These issues were addressed by an International Centre for Settlement of Investment Disputes (ICSID) tribunal in a currently ongoing construction-related dispute involving Turkmenistan.[1] In that arbitration, the tribunal ordered two Turkish construction companies to disclose whether they were the recipients of third party funding, and, if they were, to disclose the names and details of the funder and the terms upon which the funding had been provided.

The potential conflict of interest of arbitrators turns on the point that a practitioner whose fees are being paid via a third party funder in one matter could later serve as an arbitrator in a separate proceeding in which one of the parties was receiving money from the same third party funder. Knowledge that a member of an arbitral tribunal has a separate commercial relationship with a third party funder involved in the funding of a party before that tribunal would be material to the appointment of that particular arbitrator to the tribunal.

Likewise, knowledge that the opposing party in an arbitration has a need for third party funding would directly inform whether an application for security for costs by the respondent was necessary to protect against the risk of not being able to recover the costs of the arbitration. ICSID tribunals have been prepared in appropriate cases to order security for costs from the claimant in order to ensure that funders (who are outside the jurisdiction of the tribunal) bear some of the risk of an adverse costs outcome in the arbitration.[2]

The ICSID tribunal in the Turkmenistan case, in making disclosure orders as to the identity of the third party funder and the terms of the funding, were clearly concerned to protect the integrity of the proceedings. The tribunal made the point that such disclosure was necessary to allow for a determination to be made, if necessary, as to the independence of the members of the tribunal and in order to understand the true basis upon which an application for security for costs was being made.

The importance of this ICSID decision is that parties to the proceeding should not assume that third party funding arrangements will not be exposed in the arbitration process. A claimant in an ICSID arbitration who is the beneficiary of third party funding ought to be prepared for the risk that those funding arrangements may have to be disclosed. Once disclosed, the claimant may also need to be in a position to contest (or otherwise meet) an application for security for costs which might be brought by a respondent state.

[1] Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan, (ICSID Case No. ARB/12/6) Procedural Order No. 3 (June 12, 2015).

[2] See, e.g., Europgas Inc.and Belmont Resources Inc. v Slovak Republic (ICSID Case No. ARB/14/14) Procedural Order No. 3 (June 23, 2015)

Download Crossing Borders: International Arbitration Insights - Where will we be in 2028?

Crossing Borders is a periodic review of developments in international arbitration across the world. Included in this special 10th edition, we explore what arbitrations will be like going into 2028 - where, how and by whom disputes will be decided.

Belt and Road Hub

We explore the opportunities the Belt and Road Initiative brings for your business, and provide our comprehensive, professional services to help.

Belt and Road

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
Share on LinkedIn Share on Facebook Share on Twitter
    You might also be interested in

    Trump issued an executive order addressing security issue to block mobile application WeChat owned by Tencent Holdings Ltd.

    24 September 2020

    As of May 1, 2020, parties making a voluntary notice filing with CFIUS will have to pay a filing fee. There is no fee for declarations under the mandatory filing regime. The Treasury Department’s...

    26 May 2020

    As of May 1, 2020, parties making a voluntary notice filing with CFIUS will have to pay a filing fee. There is no fee for declarations under the mandatory filing regime. The Treasury Department’s...

    19 May 2020

    There is no doubt China deals have been more difficult to clear during the Trump years than they were previously. A database maintained by KWM shows a clearance rate of over 95% during the final...

    08 May 2020

    Legal services for your business

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.