PDF Third-Party Funding in International Arbitration

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Allahabad has added only Rule 2 of Order XXV, which states that costs may be secured from the third-party funding of litigation. Therefore, the concept of third party funding is not alien to the Indian Jurisprudence. But it should be noted that there is no law expressly allowing or barring third party funding in arbitrations seated in India.

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The Arbitration and Conciliation Act, makes no mention of third party funding. The presence of a third party funding clauses in specific state amended Civil Procedure Code cannot adduce the legality of a similar clause in arbitrations. Therefore, any possible third party funding agreement would depend on it being a valid contract under the Indian Contract Act, The Supreme Court had ruled that a champerty contract in which the returns are contingent on the success of the case is not per se illegal, except in cases where an advocate is an party 6.

Third-Party Funding in International Arbitration

There can be further challenges in Indian jurisprudence when a third party has funded the claims while executing the arbitration award. As of date, there are no cases which have discussed the validity of an award which has been obtained by third party funding. One of the grounds for challenge are that the petitioners had entered into a third-party funding agreement, and that execution should not be permitted as the funding agreement is champertous in nature and therefore, against the public policy of India.

The matter is sub-judice and the decision of the High Court would give clarity to the legitimacy of third party funding agreements and its impact on the execution of an award. Since FEMA does not explicitly classify third-party funding as either a current or capital account transaction, it is uncertain as to how such funds would interact with the regulatory regime, especially since both these transactions are viewed very differently under FEMA rules and regulations 9.

Therefore, this note does not detail the applicability of FEMA to third party funding agreements. Different scenarios which may arise in enforcing arbitral awards where the claimant has been funded by a third party. The enforcement of third party funding agreements, and the arbitration awards where a third party had funded the claimant, can differ depending on where the award or the third party funding agreement are being enforced.

International arbitration: Market trends and legal issues in third-party funding

Some of these circumstances are:. The seat of arbitration: If an award has to be enforced at the seat of the arbitration then the said enforceability would depend on the seat of arbitration and its laws regarding the legality of the third party funding agreement. The Irish Supreme Court had held that due to the presence of a third party funding agreement the arbitration award violated the public policy of Ireland and therefore the award was liable to be set aside.

But at the same time it should be noted that international arbitration has an increasing trend of accepting the trend of third party funding. The tribunal in Giovanni Alemanni v. Focus in the article was directed on enforcement of awards rendered in arbitrations involving third-party funders in countries where funding is impermissible. It cannot be ruled out that courts in such countries develop a tendency to refuse enforcement of funded awards.

As for countries bound by the New York Convention, the question ought to be raised whether such an action would even be allowed.

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The authors of the mentioned article emphasize the valid point that signatory countries may not refuse enforcement of arbitral awards, save upon a few narrow grounds. The only potentially applicable ground that could merit such refusal of enforcement is public policy, and it remains to be seen whether any of the countries engaging in skepticism towards third-party funding will develop any case law in this regard.

Therefore, it can be inferred that there is no uniform opinion on whether the execution of an arbitration award can be challenged in a jurisdiction on the basis of the third party funding agreement. There are decisions in favour of allowing the executions of the awards on the basis of the New York Convention and this decisions have found favour with the leading academicians of the field.

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  • But, as the above cited Irish Supreme Court case has illustrated, a country can also deny the execution of an award on the sole reason that the award was obtained by way of third party funding. Even though such decisions may discourage a funder, the international trend is clearly indicative of the fact that the third party funding agreements would soon be a widely accepted and legitimate practice.

    Third party funding agreements entered into where the claimant resides: In this scenario a claimant enters into a third party funding agreement and this agreement would be legally valid in the jurisdiction the claimant resides at. But would this agreement be legally valid when the award is being enforced in a different jurisdiction? The Scottish company had entered into a third party funding agreement to fund the arbitration against Essar. The arbitral tribunal had upheld the validity of this agreement and this was upheld by the English Court while enforcing the award.

    At the same time it needs to be highlighted that the English Courts are increasingly adopting a pro arbitration stance. Therefore, the validity of the award would depend on the approach adopted by the court executing the arbitration award. Validity of the third party funding agreement and the arbitration award at the place of execution: After a bare perusal of the above cited judgments and academic literature it can be stated that the place where the arbitration award has to be executed should be a jurisdiction where third party funding agreements are legally accepted.

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    A third party funding agreement can be legally sound where it was entered into but an award can be set aside by the executing court if that jurisdiction does not recognize third party funding agreements. The leading academicians and international arbitration awards have opined that interpretation of the New York Convention should be the only guiding factor when executing such awards. A narrow interpretation should allow for such awards to be passed without courts applying their national laws restricting third party funding agreements.

    The execution of an award, where a third party funding agreement is present, is usually dependent on the legitimacy of such agreements in that jurisdiction. In instances like the decision by the Irish Supreme Court, a third party funding agreement can be held to be violative of national laws. But, decisions by the English, Australian and Singaporean courts have shown that irrespective of where the third party funding agreement was entered into the courts would allow for the execution of the award. From the perspective of a funder, whose sole aim is to recover its investment, the countries which have specific laws Hong Kong and Singapore or the countries where third party funding has been a widely accepted practice England and Australia are the ideal jurisdictions to participate in arbitrations.

    Others firms may not charge for this, but then demand to be compensated by the third-party funders for their time, which makes successful funding more difficult. Prospective litigants must be aware that it will take a significant effort on the part of lawyers for them to obtain funding and that they will almost always be required to have a lawyer in place to assist them during the due diligence procedure.

    They also should be aware that the fees to be charged by lawyers may determine whether or not a case will be funded, as legal fees tend to be the greatest cost of resolving a dispute by international arbitration. On the other hand, prospective litigants are often not aware of the complexity of their cases. Their emotional attachment to a dispute may make a case look stronger than it is according to the applicable law.

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    When assessing all possible implications which might affect the final outcome, third-party funders are strict. They meticulously analyse any possible risk or uncertainty prior to granting the necessary funds. Many third-party funding analysts are former lawyers themselves, with considerable knowledge of international arbitration law and procedure. Prospective litigants should be honest and disclose all relevant information to the potential funders.

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    Any illegal action undertaken by the litigants might negatively affect the decision of the funders to invest. More than one counsel or litigant has also been sued for failing to disclose all relevant information to third-party funders in the past. It is said that only one of twenty arbitrations seeking funding is funded. While there is no hard and fast rule, it is certain that only very strong cases will be funded.

    Third-party funding in international arbitration

    For a funder to decide it is willing to fund an international arbitration, the highest possible chance of success is crucial. Doubt with respect to a single legal issue may be sufficient to undermine the possibility of third-party funding. Some funders will simply not consider claims whose value is less than USD 20 million, while others are more flexible in this regard, comparing the amounts to be invested versus the prospective returns. Funders are very cautious and demand hard evidence of potential damages, while discounting claims for lost profits, moral damages and other forms of compensation that are less frequently awarded in practice.

    The lower the cost of funding the dispute, and the greater the amount of potential compensation, the greater the chances that a third-party funder will actually fund a dispute. It has been said that the ratio of potential returns to the costs of funding must be to-1, but there seems to be no hard and fast rule in this respect. Sometimes, although the litigant has suffered considerable losses, the chances of obtaining compensation are in fact small, for instance due to issues such as the statute of limitations.

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    Even if a case is straightforward, there may still be uncertainty for funders regarding the risk of enforcement. The enforcement of arbitral awards depends on national judicial systems. Eventual success may depend on the accessibility and transparency of a judicial system, or the availability of assets in multiple jurisdictions. Moreover, it might occur that the successful litigant is merely one of many creditors waiting for enforcement on the same capital of a company that decides to be liquidated following a negative arbitration ruling. While insurance may be available to hedge against such risks, this issue needs to be explored with the funder at the outset.

    If the odds of success are favourable and the ratio of potential returns to the amount of funding is high, the funder will be willing to enter a contractual relation with a prospective litigant.