TPF beyond COVID-19: What can we expect in the post-pandemic scenario? By Sami Houerbi (ICC) and Sima Ghaffari (ACIC)
Introduction
International arbitration itself is still evolving. The emerging trend of Third Party Funding (hereinafter TPF) in the realm of international arbitration has led to the presence of a new player in the context of arbitration which is the third-party funder. It is claimed that TPF is fueled by the economic crisis in 2008. In recent years, many legal practitioners have produced a vast wealth of literature with regard to TPF and considered it as a revolution and evolution. It is, however, still replete with ambiguity and uncertainty.
Covid-19 pandemic can be considered an economic sickness. Disputes are an inevitable part of business life. Now, with regard to the current situation and the instability of the financial markets, despite the fact that the long time impacts are yet to be seen, it is of clarity that we expect to see more claims in the post coronavirus world. Force majeure and material adverse event clauses invocations under contracts in cash crunch environment, delay in performance or non-performance can lead to a lot of litigation or arbitration cases. The pandemic has accelerated the future for TPF and it has brought it up to speed, much faster than we could think. To this end, TPF should receive its fair share of attention and accordingly, raising more awareness on the legal issues of this mechanism seems vital in these turbulent times. If not now, then when?
Keeping this background in mind, this update will analyze the role of TPF in the post-corona era. In doing so, it addresses the reasons for the possible influx of foreign investment through TPF and the increase in TPF following the far-reaching reverberations of COVID-19. Finally, by addressing some of the legal challenges and the shortcomings associated with the current legal framework of this mechanism, it concludes with why TPF should be regulated.
Rise of demand for TPF
Needless to say, the COVID-19 pandemic has led to cash flow and budget constraints for businesses in different sectors and regions. Since a financially incapacitated party may seek TPF to pursue alternate sources of funding to ensure the advancement of pending claims or to bring new claims arising out of the pandemic, TPF can help impecunious claimants to pursue their claims through arbitration or even litigation. Of course, the litigation funding market is outside the scope of this update. According to the 2018 Survey findings of QMU, 97% of respondents are aware of third party funding in international arbitration. From a practical point of view, the growing utility of TPF would transform the landscape of arbitration and would be the new normal like what it is claimed about virtual hearings.
Accordingly, with the wave of countless disputes, TPF is likely to be a commercial solution in a recovering economy, a cash management tool, an opportunity to access to justice, promote due process and a method for dispute resolution in a risk averse and cost-effective manner. Considering the enforcement risks, it should be noted that many claims are not de-risked and TPF is an opportunity to share the risks and it is normally provided on a non-recourse basis. Hence, obviously, funders tend to make great gains by playing in this market and their funding is in exchange for a predetermined percentage of the outcome if the claim turns out successful. In doing so; they conduct an assessment of the potential returns, investment considerations, the strength of the merit of the case, length of the proceedings, the proportionality of costs to likely recovery of damages and etc.
Most importantly, since the solvency of the other party to cover the costs impact the ease of enforcement, it should also be taken into consideration in the decision-making process. Being on the verge of insolvency on the one hand and pending cases, delays, extension of the briefing schedules, as the consequences of the pandemic, on the other hand, would affect the funders’ decisions for investment. In this regard, law firms and solo lawyers representing claimants can play an important role on the funders’ decisions by clearly presenting the factual and legal aspects of the case at hand at the outset of the process.
Main challenges of TPF
Potentially, the challenges related to disclosure of TPF and security for costs are slippery slopes that can lead to severe risks in relation to the efficiency of arbitration. One of the most heatedly debated challenges regarding TPF is the possible conflict of interest which is the result of lack of concrete regulation. Considering the small number of the funders, the possible future increase of TPF in the post Corona era and the rise of the funded claims, more conflict of interest would exist. While impartiality and independence of arbitrators may be endangered by the presence of the funder in numerous scenarios, there is still a remarkable uncertainty over the duty of disclosure about the presence of the funder.
To date, there is no global consensus about disclosure procedures. Even the IBA Guidelines on conflict of interest does not address the TPF expressly. Limited or partial disclosure, without going into the details of the funding agreement, can mitigate or manage potential conflicts of interest and therefore, it can deepen the effectiveness of TPF. Hence, in light of the assessment of possible conflict of interest, arbitrators can be aware of the involvement of a funder and it would avoid the hidden conflict of interest scenarios. Given the importance of professional ethics and secrecy, it is essential to ensure that existing privileges are not lost.
Another procedural issue raised by the involvement of third-party funders is security for costs which is a type of provisional measure sought by the party who is the respondent to a claim or counterclaim. It also reduces the risks of the so-called “arbitral hit and run”. According to the proposed standards of ICCA-QMU task force, “An application for security for costs should, in the first instance, be determined on the basis of the applicable test, without regard to the existence of any funding arrangement”. Some believe that the mere presence of the funder should give rise to a presumption in favor of security for costs. In assessing the security for costs, the tribunal considers many elements like prima facie case on the merits, terms of the funding arrangement (as it was mentioned in Progas Energy Limited v Islamic Republic of Pakistan case [2018] EWHC 209), evidence of inability to pay like insolvency or indicia of financial distress. Given the economic situation at hand, this issue would be more complex.
Final remarks
With the above in mind, the urge that drives us to discuss such an issue comes from the great economic uncertainty precipitated by COVID-19. TPF, as a fast growing industry, would be worth considering for the businesses as an important funding alternative and a method to enhance access to justice in these challenging times. Yet, the existing arbitration rules and legal frameworks do not sufficiently deal with it in international arbitration. As mentioned by Professor Rogers in Ethics in International Arbitration, “the lack of any regulation or precedent regarding the disclosure of the third-party funders is more due to the novelty and uncertainty surrounding the subject and surely not because it is unnecessary”.
TPF has found its acceptance in many legal systems since many arbitration-friendly jurisdictions have removed prohibitions on the said mechanism like Singapore, Hong Kong and Nigeria. Some jurisdictions still forbid TPF by applying the common law doctrine of champerty and maintenance. Nonetheless, for increasing certainty, TPF needs to be promoted and regulated on a national or international level, not prohibited.
It is of utmost clarity that in order to better implement this mechanism into the architecture of arbitration and amplify the development of arbitration, revision of the rules, reform initiatives and therefore, incorporation of provisions about the limited duty of disclosing the funder are vital. In the context of investment arbitration and ISDS claims, it is worth mentioning that ICSID, in its recent proposed updates, has incorporated rules on TPF and also mentioned the ‘increased resort’ to funding in its cases.
Conclusively, desperate times call for desperate measures. It is time for arbitral institutions to shed some light on TPF and provide some straightforward indications about its current challenges in order to shape an integral part of the future of the arbitration community and resolve the ambiguities highlighted above in the post Corona era.
September 2020