Third party funding: a game-changer for construction disputes?

The complexity and expense of construction disputes can often be a daunting prospect, especially for contractors which may already be facing funding shortfalls due to accumulated unpaid claims or cost overruns on the project itself. Third party funding offers a third viable option for those parties, which would otherwise be faced with the alternatives of either writing off their losses or negotiating unfavourable settlements.

Third party funding involves an entity that is not a party to a particular dispute financing a party's legal fees and expenses in return for part of any amount recovered by that party in the dispute. For instance, in an international arbitration, the third party funder could agree to cover the costs incurred by the party for lawyers, experts and all other associated costs in exchange for an agreed percentage of the proceeds of the claim, whether obtained in an award or through settlement.

Funding is usually provided on a non-recourse basis meaning that if the claim is unsuccessful, the funder usually loses its investment and has no recourse against the funded party. For example, in January 2019, the Paris Court of Appeal annulled the findings on damages in a $1.3 billion investment treaty award in favour of Canadian mining company Rusoro against Venezuela. Calunius Capital, the third-party funder which backed Rusoro's claim in this case, suffered a major setback as a result.

An international perspective

Construction disputes typically involve technical issues as well as issues of delay and quantum and are recognised, as a result, as being notoriously complex and expensive to run. This is one of the reasons that the International Chamber of Commerce (ICC) issued an updated report on arbitrations in the construction industry in February 2019, recommending tools and techniques for the effective management of construction arbitrations.

However, these tools and techniques are unlikely by themselves to reduce the high costs associated with construction arbitration. This raises the question of how to fund these costs. In April 2018, in its final report on third party funding in international arbitration, an ICCA-Queen Mary task force noted that "[t]he business of law is changing and dispute funding is very much an integral part of the future of the global and litigation markets".

In keeping with this evolving legal landscape characterised by increasing demands from parties to find new funding mechanisms - and the corresponding rapidly growing global market for dispute funding - Hong Kong has recently amended its Arbitration Ordinance. These amendments, which came into effect on 1 February 2019 and follow the publication of the highly anticipated code of practice of third party funding of arbitration on 7 December 2018, were highly anticipated. They are aimed at allowing and regulating third-party funding in international arbitrations and mediations seated in Hong Kong.

The developments in Hong Kong follow, in varying degrees, similar developments in Singapore and the United Kingdom. Singapore enacted its Civil Law (Third-Party Funding) Regulations on 10 January 2017, followed by the publication of the Singapore Institute of Arbitrators guidelines for third party funders. The UK, for its part, has opted for self-regulation of third-party litigation funding through the English Association of Litigation Funders' Code of Conduct which was first published in 2011, and revised in 2014.

While other European countries are yet to introduce regulations in this area, third party funding remains very much a focus of the arbitral community. For example, in France, the Paris Bar Council adopted a resolution in support of third party funding a couple of years ago. The resolution confirmed that third party funding is not prohibited by French law and is in the interests of clients and their legal representation alike, especially in the field of international arbitration. The Paris Bar Council did, however, highlight two main challenges posed by the presence of a funder: the impact of the involvement of a third party on the ethical obligations incumbent on legal counsel, particularly in regards to conflicts of interest and professional secrecy; and the issue of disclosure of the funding arrangement.

Use of third party funding in construction disputes

Third party funding can facilitate access to justice by allowing parties to bring meritorious claims even where they might lack the financial resources to do so. More broadly, it can be a useful tool as far as risk and resource management are concerned.

Even the strongest of claims includes an element of risk and, given the uncertainty inherent in the outcome of a litigation or arbitration procedure, a party can never bank on full recovery of the anticipated costs. Third party funding allows for an effective allocation of the risk involved by relieving the funded party of part or potentially the entirety of the risk involved, while providing a helpful indication as to whether the claim is worth pursuing based on the third party funder's assessment. Furthermore, since the intermediate and direct costs are borne by the funder, the funded party is free to allocate the resources and funds which would otherwise be tied up in pursuing the claim to other matters.

That said, third party funding carries its own set of risks and challenges. Funded parties should carry out careful due diligence on the proposed funder including its reputation, track record and financial resources. The involvement of an additional party will also bring added complexity to the progression of the claim and may give rise to confidentiality issues and potential conflicts of interest. Funded parties should enter into confidentiality agreements with the funder as a safeguard against the exposure of confidential information.

In arbitration cases, the conflict of interest must also be considered in relation to the arbitral tribunal and especially the independence and impartiality of the arbitrators. Although there is no uniform set of rules compelling a party to disclose its funding arrangement, non-disclosure can serve as a potential ground for the annulment of the award and may therefore constitute an obstacle to successful enforcement.

Frédéric Gillion, Hollis Dufour and Toshima Issur are arbitration experts at Pinsent Masons, the law firm behind Out-Law. A version of this article appeared in Construction Europe.