24 May 2017

Cards on the table? Thoughts on disclosure of third party funding

This article was written by partner Dorothy Murray and associate Edmund Northcott. 

As more jurisdictions permit third party funding of international arbitration, the question of whether details of the funding must be disclosed arises ever more frequently.

Concerns to date focus on conflicts (ensuring that the identity of the funder poses no challenge to the independence and impartiality of the tribunal) and the ability of a respondent to apply for security for costs. The Tribunal in the case of Muhammet Çap v. Turkmenistan[1], was motivated by these concerns when requiring the Claimant to disclose whether it was being funded by a third party funder, and if so, the funder’s identity and nature of the funding arrangements, including to what extent the funder would share in a favourable award to the Claimant.

Singapore removed long standing prohibitions against such funding in January 2017. Hong Kong looks to follow suit shortly with the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 (the “Bill”), which is currently gazetted before Hong Kong’s Legislative Counsel.

The process of legislative reform in Singapore and Hong Kong have both contemplated standards of disclosure. In the case of Hong Kong, the Bill requires disclosure of the existence of a funding agreement and the name of the third party funder upon the commencement of the funded arbitration (if the agreement is made on or before the commencement of the arbitration) or within 15 days (if a funding agreement is entered into after the arbitration has commenced).

In the case of Singapore, whilst the Civil Law (Amendment) Bill abolished the common law torts of champerty and maintenance, it has been left to subsidiary legislation and regulations to deal with the standard of disclosure required. It is widely expected that, like Hong Kong, Singapore will adopt a “light touch” regulatory approach to disclosure.

For arbitrations seated in other jurisdictions, which do not have a law that clearly delineates what is to be included in the "costs" of an arbitration or rules that mandate disclosure of funding arrangements, the recent decision of the English High Court in Essar v Norscot[2] adds another argument to the armory of the party seeking disclosure.

The award in question was made under the 2012 ICC Rules in England. It concerned a claim by Norscot (Claimant) that Essar (Respondent) was in repudiatory breach of an operations management agreement. The sole arbitrator found for the Claimant and awarded USD4 million together with indemnity costs – including allowing the Claimant to recover its third party funding costs.

The terms of the funding were market standard: funding of GBP647,000 in return for, in the event of a win, an uplift of three times those costs or 35% of the Claimant’s recovery, whichever was greater. The funder was therefore entitled to GBP1.94 million from the Claimant, which the Claimant sought to recover from the Respondent.

The Court upheld the Arbitrator’s decision, and refused a challenge under s.68(2)(b) of the Arbitration Act 1996 (the “Act”), holding that the Arbitrator did not exceed his powers:

The ICC Rules and the Act give arbitrators a wide discretion as to costs – including deciding that the “other costs” each referred to may include funding costs.[3] Even if the Arbitrator was wrong, his decision was not an excess of power.

The Court agreed with the Arbitrator in any event: “other costs” could include third party funding costs.

Both the Arbitrator and the Court appeared influenced by the conduct of the Respondent in the arbitration. The facts suggest that the Respondent had set out to suffocate the Claimant by forcing it into expensive litigation, which the Respondent knew the Claimant could not afford. The Claimant therefore had no choice but to source litigation funding. Whether the Respondent’s behaviour should be determinative when assessing Claimant’s costs is questionable; a costs order should function to reimburse the successful party for having to go all the way to formal proceedings, rather than reprimand the losing party for their actions. For example, if the funder’s costs had not been so great, would the Arbitrator have sought to penalise Respondent through other means?

Third party funding is not just the choice of the impecunious, however. Many sophisticated parties are attracted to removing risk and cost from their balance sheet by using funding. What also of parties who obtain funding not from formal funders, but on terms from group or associate entities? It is unclear how the reasoning in Essar will apply to them, as the Court did not appear to envisage that such costs would be recoverable as a matter of course or routine.

This raises a more fundamental concern with the award and judgment – that the “costs” of third party funding are, while of course a “cost” to the funded party, they are not procedural “costs” of the arbitration. They are the price of a separate contract outside the arbitration by which the funded party pays an agreed contingent future price to lay off its cost risk. They may in circumstances such as Essar be damages, but would have to be pleaded as such.

Notwithstanding the criticism and confusion created, this case will first, embolden funded parties (typically claimants) to seek to recover such “costs” in arbitrations under the ICC Rules and others that contain similar provisions (which includes the LCIA Rules); and second, promote applications for disclosure of funding. The tension to date in the issue of disclosure has been in the extent to which disclosure should be required. This decision goes straight to the fullest disclosure. If a party is to be at risk for funding costs, there seems a strong argument that it should be entitled to know at least of the existence and the terms of that funding. Where disclosure of funding terms is ordered due to a risk of costs liability, funders have few persuasive grounds to resist such disclosure, given how punitive the arrangements can be for the paying party. Funders may view themselves better-off following Essar, but any benefit is likely to come at the expense of full disclosure of their funding agreements.

As with many things, the final word will be left to the tribunal’s discretion: there is no guarantee of recovery and no certainty about how “reprehensible” behaviour has to be before it crosses the line considered to have been crossed by the Respondent. The arbitrator’s decision seems to have been used to punish the Respondent, rather than compensate the Claimant for costs actually incurred. On this basis there is now a stronger argument to suggest that funder’s costs should be characterised as damages if grounds exist to do so on the facts, and be pleaded and proven in the arbitration, rather than left to the (unpredictable) discretion of the arbitrator. Belt and road investors should therefore carefully consider the permissibility of third party funding, and any disclosure and costs implications of the same, when drafting the dispute resolution clauses for any investment.

[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] Essar Oilfields Services Limited v Norscot Rig Management PVT Limited [2016] EWHC 2361 (Comm).

[3] Article 37(1) of the 2012 ICC Rules includes in the “costs of the arbitration” the “reasonable legal and other costs incurred by the parties for the arbitration.”; s.59(2) of the Act states that any reference to the costs of the arbitration “includes the costs of or incidental to any proceedings to determine the amount of the recoverable costs of the arbitration.”

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