Third-party funding or litigation finance agreements have become increasingly popular and accepted methods to finance commercial disputes. While some U.S. jurisdictions prohibit enforcement of finance agreements under champerty and similar laws, the majority of jurisdictions now permit them. Examples of champerty state law restrictions on enforcement of funding agreements are discussed in my recent article titled “Champerty re-emerges: an overview of recent US Circuit Court rulings on third-party funding” appearing in the May 2020 Issue of the IBA’s International Litigation News.
Various issues may arise involving funding agreements. Generally, in arbitration proceedings, identification of a funder is aimed to assess potential conflicts of interest between the parties/funders and the arbitrator. Given that identification of a potential relationship is the central issue, little disclosure beyond the fact and identity of the funder is generally required.
By contrast, the issues in litigation generally arise during discovery or at evidentiary stages of the proceedings and implicate more fulsome requests for disclosure. The case law dealing with litigation finance generally addresses preliminary issues of relevancy and, when established, whether the information is otherwise subject to protection based on privilege or confidentiality concerns. Bias may also be a concern in litigation, for example, if a witness is thought to have an ulterior motive or financial interest in the underlying matter. These are merely illustrative examples. In such cases, the scope of disclosure sought is generally broader, often seeking the underlying terms of such a financial arrangement. Representative issues that arise in the context of litigation are discussed in the ABA Dispute Resolution Magazine’s Fall 2020 issue titled “Third-Party Funding: Relationships, Relevance, and Recent US Court Analysis.”
This article will briefly address recent disclosure requirements in the context of commercial arbitration.
Arbitration Moves Toward Greater Targeted Transparency
Arbitrators may have relationships with funders through an actual financial interest in the funder or based on a past relationship between the funder and arbitrator or his/her law firm. Portfolio finance agreements have also proliferated which increases the potential that such relationships may be present and the difficulty in identifying them. There has been a tension in arbitration as to which party should be primarily required to disclose the existence of a funder: the party engaging the funder, the arbitrator or both. As the practice of funding has grown, institutions have varied as to the appropriate approach.
Some institutions put the obligation of disclosure on the potential arbitrator and the parties. For example, AAA Commercial Rule 17 (2013) provides that arbitrators, the parties and their representatives shall disclose “any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence, including any bias or any financial or personal interest in the result of the arbitration…” A party or representative’s failure to do so may result in a waiver of the right to challenge an arbitrator.
Similarly, Article 13(2) of the ICDR Rules (2014) provides the arbitrator with the obligation to disclose any circumstance that “may give rise to justifiable doubts as to the arbitrator’s impartiality or independence and any other relevant facts the arbitrator wishes to bring to the attention of the parties.” This may include relationships with funders where known. Throughout the proceedings, the arbitrator and parties are required to “promptly disclose” circumstances that develop giving rise to such doubts. Article 13(3). Further, a party’s failure to disclose such circumstances within a reasonable time of becoming aware of the information constitutes a waiver of the right to challenge an arbitrator’s independence or impartiality on those circumstances. Article 13(5).
The IBA Guidelines on Conflicts of Interest in International Arbitration (2014) provide guidance on the disclosure requirements by both the arbitrator and the parties. As a predicate matter, General Standard 6(b) provides “[i]f one of the parties is a legal entity, any legal or physical person having a controlling influence on the legal entity, or a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration, may be considered to bear the identity of such party.” The explanation to that provision includes recognition that “[t]hird-party funders and insurers in relation to the dispute may have a direct economic interest in the award, and as such may be considered to be the equivalent of the party.”
Based on that provision, IBA General Standard 7 “Duty of the Parties and the Arbitrators” requires parties to disclose any relationship between the party and the arbitrator or between the arbitrator and any entity or person “with a direct economic interest” in the arbitration at the earliest opportunity. In order to do so, the party must undertake a reasonable inquiry. Similarly, the arbitrator must make a reasonable inquiry to identify any conflict of interest or circumstances that may raise reasonable doubt as to his or her independence or impartiality. The failure to conduct reasonable inquiry does not insulate the lack of disclosure.
The most recent adoption of disclosure requirements by an institution is set forth in the 2021 ICC Rules which specifically apply to any matter submitted to the ICC on or after January 1, 2021. The ICC has put the obligation to disclose the existence of a third party funding arrangement squarely on the parties. Specifically, newly enacted Article 11(7) of the ICC Rules provides:
In order to assist prospective arbitrators and arbitrators in complying with their duties under Articles 11(2) and 11(3), each party must promptly inform the Secretariat, the arbitral tribunal and the other parties, of the existence and identity of any non-party which has entered into an arrangement for the funding of claims or defences and under which it has an economic interest in the outcome of the arbitration.
The benefit of this rule is its clarity. The parties are in the best position to disclose agreements they have entered with respect to a particular dispute or through a portfolio. The initial disclosure then obligates the arbitrator, in turn, to identify any potential relationship with the funder.
Similarly, the Hong Kong International Arbitration Centre (HKIAC) Rules, effective as of November 1, 2018, place the obligation to disclose the existence of a third party funding relationship and the identity of the funder on the parties. HKIAC, Article 44.1. The Rules recognize that the relationship may exist at the commencement of the case or during its pendency at which time it should be disclosed “as soon as practicable after the funding agreement is made” as well as any subsequent changes. HKIAC, Article 44.2, 44.3.
Take-Aways
Notably, the rules and guidance addressed here provide for greater transparency but do not resolve all potential issues. One problematic area remains as to the retention of a funder after a proceeding is underway and the potential impact a subsequent disclosure could have on a pending case where a conflict of interest with an arbitrator is identified midway through the proceeding. While the rules generally contemplate and require these subsequent disclosure, the impact such a retention may have on the proceedings remains unclear.
Recent institutional rules requiring party disclosure of funding agreements at any time provide greater transparency and ease the disclosure requirements for arbitrators who otherwise may be unaware a particular funder is involved in a proceeding. Obvious issues may continue to arise when a funder is engaged mid-way through a matter resulting in a conflict, particularly if such an engagement is intended to do so. No doubt this topic will continue to develop and arbitrators and institutions will fashion means to manage and address such potentialities.
By Ava Borrasso