“Third-party funding can play a valuable role in promoting access to justice, but it must be accompanied by safeguards to protect the privacy and confidentiality of the proceedings.”

-Gary B. Born

Abstract

Arbitration, as a way of dispute resolution, is gaining traction worldwide. However, the rise of Third-Party Funding (TPF) in international arbitration, driven by escalating arbitration costs, raises concerns about its impact on the fundamental aspects of arbitration. While the authors, through this article, support TPF, they emphasise the importance of preserving confidentiality in arbitration. To ensure the integrity of arbitration, the need of the hour is a comprehensive statutory framework. This article also endeavours to examine India’s stance on TPF and suggest measures for its effective integration into Indian arbitration proceedings.

Introduction

Arbitration has become one of the most favourable ways of dispute resolution for parties. However, there has been a considerable increase in the cost of arbitration, mostly due to increased institutional and arbitrators’ fees which has made it difficult for certain parties to avail themselves of this mechanism effectively. Therefore, more and more parties are opting for “Third Party Funding” (TPF) nowadays. Third-party funding refers to the process where a non-signatory to an arbitration agreement funds the proceedings of arbitration for a party to the arbitration, instead of financial profits like the share in the arbitral award, etc.^[1]

TPF is one of the most debatable and controversial issues in international arbitration.^[2] However, it is gaining global traction in the legal arena.^[3] Due to its frequent use in arbitration, it has proved to be beneficial as the parties get a level playing field. The authors are of the firm view that TPF should be encouraged rationally. However, it poses certain concerns related to confidentiality in the arbitration proceedings. Confidentiality is one of the important characteristics of arbitration and a deciding factor for a party to refer a dispute to arbitration. TPF can prove to be an effective tool in ensuring access to justice for financially constrained parties if it is regulated statutorily such that it does not undermine the interest of the parties involved in arbitration.

 

Third-party funding: promoting legal representation

One of the prominent issues confronted by the ICCA-Queen Mary Task Force^[4] was to define TPF. One of the reasons why it is difficult to define it is because of the various shapes and sizes of the economic interest in a dispute.^[5] TPF as an idea, is relatively nascent and therefore there were speculations related to their progression. Earlier it was prohibited in English law for being considered as opposed to public policy. It is evident that now the courts have taken a favourable approach toward the validity of TPF. However, it is interesting to note that Champerty was upheld by the Privy Council in India, barring the case of counsel funding for the litigant.^[6] The Privy Council permitted champerty agreements in India, with the distinction of circumstances of a lawyer and it was established that the English law of maintenance and champerty does not apply in India.[7] With the changing jurisprudence and the growing need to fund arbitration proceedings, third-party funding is now globally recognized. Funders include firms, insurance companies, hedge funds, and investment banks. Their increased participation in international arbitration disputes poses a range of ethical and legal contentions, which can affect counsels as well as arbitrators.^[8] Mostly, funders fund the proceedings for monetary gain, but that is not always the case. For instance, in the case between Philip Morris and Uruguay, the Bloomberg Foundation funded the arbitration proceedings for Uruguay under its “Campaign for Tobacco-Free Kids”.^[9]

Confidentiality: Assessing its Position Under Different Jurisdictions

One of the primary attractions of using international arbitration is confidentiality. Confidentiality among other things, urges successful, unbiased dispute resolution instead of emotional trial by media or attempts to gain undue leverage.^[10] It also lowers the possibility of causing harm to the parties by the publication of highly sensitive business information to rivals, clients, and others. This is precisely the same regarding the inherent responsibility of confidentiality, which is appropriately considered as either deriving directly from the arbitrators’ contracts or having integrated into them from the arbitration agreement.^[11] Even if they are essentially similar to those for parties, the inferred exceptions to the confidentiality obligations of arbitrators and arbitral bodies are probably limited in breadth and application. The implied exceptions to the confidentiality requirements of arbitrators and arbitral bodies are presumably restricted in scope and application, even if they are normally comparable to those for parties.

The first piece of legislation extending conflicts of interest laws in international arbitration to donors was the IBA Guidelines on Conflicts of Interest 2014 (the “IBA Guidelines”). The IBA Guidelines are progressively regarded as the gold standard to assess disputes of advantage and the impartiality of an arbitrator, even though they are not legally binding absent a contract by the parties. The IBA Guidelines were the next most common tool, with 44.4% of respondents saying they used them frequently or always.[12]

The UNCITRAL Model Law is indicative of most national arbitration statutes. The Model Law’s 2006^[13] revisions are silent on the issue of confidentiality in international arbitration instances. The English contention on confidentiality is demonstrated by the significance of confidentiality in the arbitration procedure in an 1880 common law decision, Russel v. Russel^[14]. The decision states that generally, people move into these contracts to prevent discourse in general, which is bound to be an unpleasant one, and which undoubtedly could cause to be detrimental even to the side that prevails in the arbitration. Contemporary Singaporean judicial precedents also tend to accept the English perspective on implicit confidentiality responsibilities pertaining to international arbitration negotiations.^[15]

As far as the United States is concerned, it is to be noted that Rule 45 of the American Arbitration Association (AAA) Commercial Arbitration Rules^[16] provides, that confidential information disclosed during the proceedings by the parties or by witnesses shall not be divulged by an arbitrator or an administrator. Whilst ISCID focuses on privacy, it fails to discuss it more specifically about confidentiality. In compliance with ICSID Arbitration Rule 62,^[17] the parties to the arbitration must execute an assurance declaration pledging to maintain every detail learned as an outcome of their involvement in the proceedings.

Why TPF should be promoted amid confidentiality concerns?

Generally, funders ask for certain information to track and assess the cases in which they invest. Some of the information may be confidential and hence raises concerns if shared. There are no clear guidelines about the information which can be shared, and which cannot. Since arbitration is a private affair, courts are of the view that there is no need to disclose how a party is being funded. The courts, in most cases, mandate the parties to disclose the identity of the funders but not the terms of the agreement.^[18] Arbitral tribunals have demanded the identity of third-party funders to assess the possible conflict of interest as per the IBA Rules 2014.^[19] However, tribunals do not seem convinced about the requirement of disclosure of funding agreements to ascertain the conflict of interest.^[20] In the absence of uniform guidelines, they can be applied differently to parties in different proceedings.

Meanwhile, the authors are of the view that despite the concerns about TPF, it should be encouraged in both international and domestic arbitration. The scope of TPF has broadened after the onset of the COVID-19 pandemic.^[21] With increasing economic instability and a decrease in finances, it has become somewhat inevitable for some parties to seek funds to support their cause.

 TPF & Confidentiality: Where Does India Stand?

India has no statutory framework regarding the regulation of TPF, either in arbitration or litigation. The recent amendments to the Arbitration and Conciliation Act have failed to address TPF.  Hence, funders are mostly unwilling to invest in the Indian market.^[22] Some judicial precedents superficially deal with TPF. As can be inferred from the case of Bar Council of India v. A.K. Balaji & Ors.^[23], the Supreme Court put a restriction on the lawyers to fund the litigants but didn’t hold anything expressly concerning TPF. Recently, in the case of Tomorrow Sales Agency Pvt. Ltd. v. SBS Holdings, Inc.^[24], the Delhi HC held that, since third-party funders are not party to the arbitration, they cannot be asked to disclose their assets and bank accounts and the award cannot be enforced against non-signatories to the arbitration agreement. According to Section 42A^[25] of the Act, the arbitration proceedings need to be kept confidential. The effect of this provision is not clear on TPF as of now. Also, in India, the number of funders is proportionally less than the number of litigants for they are apprehensive because of unregulated TPF. It poses a risk of conflict of interest, as there is a fair chance of appointment of the same arbitrator and funders in different matters.

Conclusion and Way Forward

TPF is a swiftly burgeoning business that will certainly be pertinent in international commercial arbitration. It has also specifically emerged advantageous since the COVID-19 period when many parties who desired to participate in the arbitration process were struggling financially. For such parties, third-party funding evolved as a potential substitute.

 In all possible situations, laws, and regulations—whether official or informal—might contribute to minimizing inefficiencies or plundering of these new finance mechanisms if we choose to move forward with TPF.  The law needs to be uniform throughout all borders to decrease the likelihood of forum shopping,^[26] in which the parties choose the location of the arbitration in a nation that favours the TPF (E.g.: Singapore, England, Australia, etc.).

By excluding certain general secrecy responsibilities and allowing individuals like counsels and guarantors to reveal the pertinent TPF arrangements, one can potentially strike a compromise between the conflicting requirements of transparency and confidentiality. Obligations to keep sensitive material private should be placed on the funders to guarantee confidentiality.^[27] However, to prevent the confidential data of the financed party or the opposing party to an arbitration action from being made public, these financiers should be free from any legal requirement to disclose to their shareholders or investors. TPF has the potential to profoundly transform the opportunity of people to seek equitable treatment and usher the individual rights to seek redressal.

References:

[1] Kandavel. K & Nithin Srinivas. J, Third Party Funding in Arbitration: An overview, 3 IJLMH, 1, 1138-1147 (2020).

[2] Burcu Osmanoglu, Third-Party Funding in International Commercial Arbitration and Arbitrator Conflict of Interest, 32 J. Int. Arbitr., 325, 330-331 (2015).

[3] Thibault De Boulle, Third-Party Funding in International Commercial Arbitration, FACULTY OF LAW, GHENT UNIVERSITY     , https://www.international-arbitration-attorney.com/wp-content/uploads/2018/09/Thibault-De-Boulle-Thesis-On-Third-Party-Funding.pdf. (Last visited on October 4, 2023)

[4] Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, ICCA, The ICCA Reports No. 4 (2018).

[5] Anthony J. Sebok, The Inauthentic Claim, 64 Van L. Rev., 61, 63 (2011).

[6] Sakshi Srivastava, Third Party Funding In Arbitration In India, ARIA, (2022), https://aria.law.columbia.edu/third-party-funding-in-arbitration-in-india/.

[7] Ram Coomar Condoo v. Chunder Canto Mukherjee (1876) L.R. 4 I.A. 23.

[8] Catherine A. Rogers, Gamblers, Loan Sharks & Third-Party Funders, (OUP, 2014), Paper No. 51-2013.

[9] CISION PR Newswire, https://www.prnewswire.com/news-releases/government-of-uruguay-taps-foley-hoag-for-representation-in-international-arbitration-brought-by-philip-morris-to-overturn-countrys-tobacco-regulations-104599339.html (last visited Oct. 3, 2023).

[10] Todd B. Carver & Albert A. Vondra, Alternate Dispute Resolution: Why It Doesn’t Work and Why It Does, Har. Bus. Rev., (1994).

[11] Restatement of the Law Third, The US Law of International Commercial Arbitration, Council Draft No. 3, ALI, (2011).

[12] Grant Hanessian and Lawrence Newman, International Arbitration Checklist (JurisNet, LLC, United States, 2009) 41

[13] UNCITRAL Model Law on International Commercial Arbitration 1985, With amendments as adopted in 2006.

[14] Russel v. Russel, (1880) LR 14 Ch D 471.

[15] Republic of India v. Vedanta Resources plc., (2021) SGCA 50.

[16] Commercial Arbitration Rules, American Arbitration Association, 2022, Rule 45.

[17] ICSID Arbitration Rules, 2022, Rule 62.

[18] Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. The Argentine Republic, (2017), ICSID Case No. ARB/09/1.

[19] IBA Guidelines on Conflicts of Interest in International Arbitration.

[20] Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, (2014) UNCITRAL, PCA Case No. 2011-17.

[21] supra note 6.

[22] Anant Garg & Sreejita Mitra, Regulating Third Party Funding in Arbitration in the Indian Context, (2022) https://www.barandbench.com/law-firms/view-point/regulating-third-party-funding-in-arbitration-in-the-indian-context.  (Last visited on October 4, 2023.)

[23] Bar Council of India v. A.K. Balaji, (2018) 5 S.C.C. 379.

[24] Tomorrow Sales Agency Pvt. Ltd. v. SBS Holdings, Inc., FAO(OS)(COMM) 59 of 2023.

[25] The Arbitration and Conciliation Act, 1996, § 42A, No. 26, Acts of Parliament, 1996 (India).

[26] Chitransh Vijayvergia, Balancing Disclosure and Confidentiality Obligations in Third-Party Funding, ACLR (Oct. 5, 2023, 8:35 PM), https://www.arbitrationcorporatelawreview.com/post/balancing-disclosure-and-confidentiality-obligations-in-third-party-funding.

[27] Gambarini Camilla & Upadhyay Shaurya, Confidentiality, (Oct. 6, 2023, 2:15 PM), https://jusmundi.com/en/document/publication/en-confidentiality.