Abstract

International Arbitration is a crucial tool for addressing the implications that emanate from the various cross border transactions. This research paper focuses on explaining the intricacies of the concept of third-party funding (TPF) and its application in arbitration. Third-party funding which is a form of arbitration where one of the involved parties is funded by an entity that is not involved in the dispute for a share of the proceeds has also become a trend in recent years. This paper discusses the importance of third-party in the current scenario, its role in the development of the arbitration process, and challenges and opportunities presented by the third-party funding. A thorough examination of this issue is necessary to present beneficial ideas regarding how Third-Party Funding affects arbitration and the legal community.

Introduction

Arbitration has been seen to undergo a shift in the financing of arbitration with third party funding used to fund the resolution of disputes. Arbitration has been considered by the past generations as the mechanism for conflict settlements whereby parties involved in conflicts do not wish to be bailed out by any external parties.[1] However, the higher costs and complexities associated with arbitration have led to the search for alternative financial creations and this led to invention of third-party financing.

It is already widely recognized that the popularity of third-party funding in international arbitration is in high demand because the involved parties are very often faced with substantial costs and uncertainties. TPF aids parties in looking for justice by removing the need for heavy economic losses and supporting valid claims submission without enforcing parties to shoulder all financial burdens. Further, TPF helps in the dispute management as it enables parties to share proceeds and maximize their potential in the competition with more resource- rich competitors.[2]

But the issue of how the use of TPF is changing the ethical landscape of arbitration, whether a third party’s funding a case creates a conflict of interest, and how this influences the fairness of the arbitration process cannot be overlooked. It is therefore of the utmost importance to carefully consider the impact of third-party financing on the arbitration and warn on how their application can be a threat to openness, fairness, and more importantly, impartiality of the dispute settlement.

Research Question

Does Third-Party Funding in International Arbitration undermine the effectiveness and the fairness of the arbitration process?

Analysis

Third-party finance has been recognized as a driving force influencing the flow of international arbitration: the force brings benefits to and poses challenges to international arbitration.[1] This paper offers a sophisticated coverage of the essence of third-party funding for arbitration with different interpretations in relation to its effect about economic accessibility, ethical concerns, procedural efficiency and organizing principles.

Financial accessibility and access to justice

TPF can improve upon justice provision through increasing the equal opportunities for parties who may not be able to afford the justice service. Differences between the wealth of parties, especially those who were more economically empowered than the other, proved to be another disadvantage of conventional arbitration as the former had more capacity to continue or contest claims. However, the third-party funding allows parties to pursue valid claims even though they are unable to afford high legal fees that would get them justice; it thus encourages equal rise in the provisions of conflict resolution.

Thus, it helps small entities, including startups and SMEs, to engage in arbitration processes that would otherwise be out of their financial reach.[2] These entities are thus positioned to employ the rights and interests on an equal level as their opponents with their help in form of financial support from third-party donors. This is part of the reason why the wider goals of access to justice are achieved and why there is an emphasis on promoting more democratic conflict resolution systems.

Ethical considerations and conflicts of interests

One of the challenges that arbitration brings to TPF is the ethical side of the proposed decision along with the potential issues of conflicts of interests.[3] Third party funding differs significantly from arbitration because arbitration is a unilateral attempt by the parties to obtain a favourable decision based on their interests, whereas third-party funding engages the third party, which is the funder whose interests often diverge from those of the parties.[4] This creates fears of lack of arbitration independence and impartiality as the financiers seek to influence arbitration proceedings to their favour and for their personal and business gains.

In addition, the lack of transparency about the third-party funding brings further ethical issues because the arbitrators and the parties when they sign the funding agreements may not be aware of the existence of such relations. There is no openness that reduces the effectiveness of the arbitral process and undermines confidence in arbitral justice.[5] Therefore, there is a need to resolve ethical issues associated with third party funding to protect the concept of arbitration impartiality and institutional autonomy.

Procedural efficiency and costs

Many have argued that procedural effectiveness and costs are unique in the TPF forum as it provides financial assistance to the parties in litigation. One of the negative impacts that may be realized on account of the presence of third-party funders is that there are more procedural complications. Sponsors may try to use their influence when additional strategic issues arise, like the selection of arbitrators or the proceedings’ management, to maximize its returns on their investments.[6] This can lead to prolonged use of arbitration remedies, and for the cost of arbitration to escalate, both of which are counterproductive for arbitration as a mechanism for dispute resolution.

Moreover, the inflationary effects that may arise from the enthusiasm by external financiers to make money may lead to the enhancement of more additional processes such as the legal authority dispute and temporary action which will lengthen the time of arbitration hearings. This is not only adding to the cost of the transactions for the people involved but also continues to delay resolution of the issue which is the crux of all arbitrations.

Regulatory frameworks and disclosure requirements

These challenges in TPF need to be addressed by stringent regulation and transparency protocols to provide TPF with the adequate regulatory and disclosure requirements to employ in the arbitration context. One idea is to initiate compulsory regime of disclosures for which legal parties must inform of the existence of such third-party funding at the start of legal actions which enables arbitrators and opposing parties to identify a potential conflict and a transparent arbitration process.[7]

Moreover, legal entities and arbitral facilities have obligations to develop ethical standards and best practices which regulate the activities of third-party sponsors.[8] It includes conditions for funders to conduct themselves according to professional ethos, disclosing their funding conditions and not to impose undue influence on arbitration proceedings to protect public from the undesirable effects of arbitration and promote public trust by embracing transparency and accountability.

Author’s opinion

The author argues strongly that third-party funding in international arbitration comes with inevitable effects on the legitimacy, efficiency, and fairness of the arbitral proceedings. Third-party funding in international arbitration entails specific opportunities and risks connected with the issue of financial access, ethical issues, efficiency of procedure, and development of governmental mechanisms. This can be achieved by incorporating requirements for transparency as well as ethical rules to the management of third parties in a way that enhances access to justice while preserving fundamental values in arbitration.

Conclusion

Companies have a more significant number of cross-border transactions today because of the interconnected nature of the world economy. However, with international activities which is an ongoing occurrence, the likelihood of conflicts is also precipitating. International Arbitration is therefore a vital mechanism in resolving disputes that come about through international commercial ventures. There are, however, several problems associated with international arbitration, even though they provide several strengths. Third-party funding, this naturally impacts the international arbitration in a positive and a negative way. On one hand, it enhances the chances of seeking justice and guarantees fairness because parties may rely on valid claims, but on the other hand, it creates negative ethical questions related to conflicts of interests and transparency. It is of utmost importance to state that rather than doing away with the difficulties described above and the alleged increasing unfairness in arbitration, proper regulation of the disclosure of information and the role of third-party funders is paramount in the arbitration process. This will assist in creating stability and confidence not only at the national level but at the global level as well.

Aditya Gupta is 5th year B.A. LL.B. (Honours) student at Symbiosis Law School, Pune and author of the Amazon bestseller Macro Economics inSimple Terms and All India Rank - 1 holder in SLAT 2020.

References

[A] STATUTES

1. Arbitration and Conciliation Act, 1996 (India).
2. UNCITRAL Model Law on International Commercial Arbitration, 1985 (with amendments as adopted in 2006).
3. New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958.

[B] BOOKS, REPORTS & ARTICLES

1. Gary B Born, International Commercial Arbitration (Kluwer Law International 2014).
2. International Chamber of Commerce (ICC), ICC Guidance Note on Third-Party Funding (ICC Publications 2020).
3. Alan Redfern and Martin Hunter, Redfern & Hunter on International Arbitration (Oxford University Press 2021).
4. United Nations Commission on International Trade Law (UNCITRAL), UNCITRAL Working Group III: Investor-State Dispute Settlement Reform (New York 2019).
5. Queen Mary University of London, Third-Party Funding in International Arbitration: Legal Ethics, Confidentiality and Disclosure Requirements (Queen Mary University of London 2018).
6. Catherine A Rogers, 'Third-Party Funding in International Arbitration: A Comparative Analysis of Regulatory Approaches' (2018) 35 Journal of International Arbitration 539.
7. Maxi Scherer, 'Third-Party Funding in International Arbitration: Emerging Trends and Ethical Challenges' (2018) 34 Arbitration International 333.
8. International Bar Association (IBA), IBA Guidelines on Conflicts of Interest in International Arbitration (2014).
9. International Council for Commercial Arbitration (ICCA), ICCA Report on Third-Party Funding in International Arbitration (2021).
10. United Nations Commission on International Trade Law, UNCITRAL Model Law on International Commercial Arbitration 1985 (with amendments adopted in 2006).

[C] ONLINE DATABASES

1. International Chamber of Commerce (www.iccwbo.org)
2. International Bar Association (www.ibanet.org)

[1] Alan Redfern and Martin Hunter, Redfern & Hunter on International Arbitration (Oxford University Press 2021).

[2] International Council for Commercial Arbitration (ICCA), ICCA Report on Third-Party Funding in International Arbitration (2021).

[3] United Nations Commission on International Trade Law (UNCITRAL), UNCITRAL Working Group III: Investor-State Dispute Settlement Reform (New York 2019).

[4] Queen Mary University of London, Third-Party Funding in International Arbitration: Legal Ethics, Confidentiality and Disclosure Requirements (Queen Mary University of London 2018).

[5] Maxi Scherer, 'Third-Party Funding in International Arbitration: Emerging Trends and Ethical Challenges' (2018) 34 Arbitration International 333.

[6] Catherine A Rogers, 'Third-Party Funding in International Arbitration: A Comparative Analysis of Regulatory Approaches' (2018) 35 Journal of International Arbitration 539.

[7] Gary B Born, International Commercial Arbitration (Kluwer Law International 2014).

[8] United Nations Commission on International Trade Law, UNCITRAL Model Law on International Commercial Arbitration 1985 (with amendments adopted in 2006).

[1] International Bar Association (IBA), IBA Guidelines on Conflicts of Interest in International Arbitration (2014).

[2] International Chamber of Commerce (ICC), ICC Guidance Note on Third-Party Funding (ICC Publications 2020).