Third party funding in arbitration – more commonly used
The number of third party funded dispute resolution cases at SCC and other arbitration institutes around the world increases every year. In the aftermath of the pandemic, this way of financing arbitration might become more common. Still quite an unregulated area, it raises several interesting legal issues, says Legal counsel Natalia Petrik.
Third party funding refers to the situation where the arbitration or litigation costs of a disputing party are covered not by the party itself but by someone who is not party to the proceedings. Such financing might be provided on a pro bono basis or as an investment, in return for remuneration. Depending on the arrangement with the party, the funder may pay the costs of the proceedings, such as the fees of the counsels and experts, institutional advances, and other costs. Funders normally expect return on their investment and therefore have interest in the outcome of the dispute. Natalia Petrik, Legal counsel at the SCC, gives us an overview of the experiences of third-party funding at the SCC, and comments on the trend in financing alternative dispute resolution in general.
Is there a current trend in using third party funding?
Yes, judging by the SCC’s caseload the number of cases where the parties disclose their funders increase every year, and generally the phenomena is no longer new. There is reason to believe that in the aftermath of the pandemic, this way of financing arbitration might become more frequently used by parties.One of the first SCC cases where the claimants were financed by a third party was filed in 2007. The tribunal had to deal with – at the time an unusual matter – of recoverability of the costs paid by the funder on behalf of the claimants. In 2020, at least six of the international cases involved a third party funder. In one of them, the funder financed the respondent party. On a separate note, the providers of financing encounter disputes too. Last year the SCC administered an expedited arbitration with a legal finance provider as a party.
Are there any legal aspects to consider when there is a third party funder involved?
Third party funding is quite an unregulated area and, therefore, it raises lots of interesting legal issues. Recoverability of costs is one of them. Another one is whether it constitutes ground for an order to pay security on costs. From the institutional perspective, it is important to safeguard the impartiality and independence of the arbitral proceedings. When running a conflict check, a potential arbitrator, as a rule, is unable to identify an entity financing the proceedings. Therefore, in 2019 the SCC adopted a policy encouraging the parties to disclose any third party with a significant interest in the outcome of the dispute, including funders, parent companies, and ultimate beneficial owners.
What type of cases are usually financed by a third party?
Most of the SCC cases that I mentioned had claims over 100 million euro. Some of them concerned investor-state arbitrations. With the exception for one case, legal funding was provided to claimants, rather than to respondents. In most cases, the other party requested a security for costs order, referring to third party funding as one of the grounds. However, tribunals tended to reject such requests if other grounds were not sufficient to grant the security for costs.