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Third Party Arbitration Funding is on the Rise—And Stakeholders are Rising to the Challenge

- Steven Pong

Third party funding is the practice of financing an arbitration case in return for a portion of the proceeds awarded in the financed party’s favor.  The funder may expect to receive a percentage of the damages awarded or a multiple of the cost of arbitrating.  Although the practice was relatively rare about a decade ago, it has become increasingly common.  This growth parallels the growth of third party litigation funding.  Few statistics exist to directly measure the popularity or scale of third party arbitration funding, but indirect indicators suggest that the practice is growing apace.  In fact, a number of arbitration finance firms operating in common law jurisdictions have reached global recognition in the past decade, and in December 2016, two of them announced that they had agreed to merge.

The practice still generates a good deal of debate.  Supporters say that third party funders improve access to justice by helping parties settle disputes that might otherwise be too expensive to take on alone.  Critics warn that third party funders introduce big ethical dilemmas to arbitration: they underwrite bad claims, introduce conflicts of interest, promote moral hazard, and undercut a party’s autonomy to resolve a dispute.

To discourage the growth of frivolous disputes underwritten by those with means, common law jurisdictions once imposed outright bans on third party funding under centuries-old legal doctrines.  But in recognition of third party financing’ ability to improve access to justice to parties with lesser means, the practice is no longer banned in many common law jurisdictions like Australia, the United Kingdom, and the United States.  Moreover, other common law jurisdictions such as Hong Kong and Singapore that play host to bustling dispute resolution tribunals are either pondering a repeal of the ban or have recently passed laws that legalize the practice.  Indeed, in January 2017, the Singapore Parliament passed a bill to legalize the third party financing of arbitration and mediation, and last October, Hong Kong’s Law Reform Commission recommended changes to the region’s arbitration ordinance to permit the practice, too.

Even though third party arbitration funding in civil law jurisdictions has not been subject to traditional common law bans, the popularity and growth of the practice has been uneven among countries.  The practice is common in Germany, and third party funders there range from stand-alone outfits like FORIS AG to ventures backed by insurance giants like Roland and DAS.  In France, by contrast, the practice is rarer, even though Paris is home to the ICC international court of arbitration and French law does not appear to prohibit or limit it.

Stakeholders are responding to the global growth of third party arbitration funding and to its skeptics.  In 2014, the International Bar Association (IBA) released best practice guidelines to prevent conflicts of interest in international arbitration.  The drafters of agreements between third party financiers and their debtors increasingly look to best practices for fair financial terms and the disclosure of conflicts.  Arbitration tribunals are looking for the right balance between disclosure and confidentiality; the ICC for example, issued a notice in September 2016 that clarified an arbitrator’s duty to disclose conflicts and is consistent with the IBA’s guidelines.  And governments are considering how to put an imprimatur on third party financiers that follow financial and ethical best practices without imposing unnecessary regulations.  The goal is for these changes to discourage harmful financial speculation, ensure that third party funding is disclosed in advance to maintain the neutrality of arbitral forums, and preserve the traditional emphasis on confidentiality and party autonomy that arbitration proceedings enjoy.