Out-Law Guide | 18 Nov 2020 | 9:58 am | 22 min. read
TPF arises when a third party litigation or arbitration funder provides financial support to enable individuals or commercial entities to pursue or defend legal proceedings. In most jurisdictions with a common law system, such arrangements were traditionally illegal or void, most notably on the grounds of being contrary to the legal doctrines of maintenance and champerty. In recent years, however, there has been a move away from this out-dated position and TPF is now permitted in a number of jurisdictions for international arbitrations and court proceedings related to international arbitrations.
There were of course reasons for TPF and similar arrangements being illegal, but the greater access to justice that TPF gives all litigants, together with the effective way TPF is regulated (or self regulated) in those jurisdictions where it is permitted, means that it has become a significant part of the international arbitration landscape. In the Covid-19 era and beyond, TPF will be even more important with corporations facing unprecedented economic stresses and increasing pressure on cash-flow. In that context, we note that the new 2021 ICC Rules of Arbitration, which will come into force on 1 January 2021, explicitly refer to TPF and include at Article 11(7) a new requirement for parties to disclose any TPF arrangements so that any potential conflicts of interest can be identified and managed.
Pinsent Masons are enthusiastic supporters of TPF and are increasingly involved in international arbitrations where TPF is provided. This guide is intended to provide our clients with a succinct picture of TPF in the major jurisdictions where Pinsent Masons conduct international arbitrations. The guide highlights the key features in each of the jurisdictions covered, but local legal advice should be sought on whether TPF on the terms intended with the funder is permissible.
Third party funding is permitted and on the rise in England and Wales.
The relaxation of the common law rules of maintenance and champerty spawned a rapidly growing funding market with England and Wales emerging as a key jurisdiction for funded claims. Provided the funding agreement does not give the funder an unreasonable return or the right to control the dispute, TPF in an arbitration (and related court proceedings) seated in London is permitted as of 1967.
The relaxation of the common law rules of maintenance and champerty has resulted in a rapidly growing funding market, with England and Wales emerging as a key jurisdiction for funded claims.
The current landscape of TPF in England and Wales began to be carved out due to a more pragmatic approach taken by the judiciary in various court decisions from 2002 to 2005 as part of the desire to improve access to justice. Since then TPF has and continues to become more prevalent across the legal market in England and Wales, both in terms of the number of cases being funded and in the number of specialist firms offering funding. Although no formal regulation of TPF has been found to be necessary, self-regulation in the form of a code of practice was advisable to provide a layer of protection to funded clients. This led to the Code of Conduct for Litigation Funders published in November 2011 (the Code) together with the formation of the Association of Litigation Funders of England and Wales (ALF). The Code requires funders to behave reasonably and sets the standards for the capital adequacy of funders, including the specific, limited circumstances in which funders may be permitted to withdraw from a case. Although ALF membership is voluntary, most established third party funders in London have joined. At Pinsent Masons we strongly advise parties to only consider third party funders that are approved members of ALF because they are guaranteed to have access to capital immediately within their control and to comply with all the other provisions of the Code.
There is no general requirement under English law for a party to disclose a TPF arrangement to any opposing party or to the court or tribunal. However, from an ethical standpoint, disclosing the existence of funding in arbitrations is desirable given the potential for conflicts of interest between third party funders and tribunals. This is particularly relevant if a tribunal has sat in a number of cases where the claimant has been funded by the same funder, or if the funder is evaluating a case in which the funded claimant is represented by that tribunal's law firm or chamber.
Preparing a claim for a third party funder to assess invariably involves the sharing of confidential documents and legal advice as early as the 'initial chat' stage. The terms of a funding agreement also typically require a client's legal team to send to the third party funder regular reports detailing the case progress. Under English law, a party is able to share privileged and confidential material with a limited number of third parties under an express agreement to keep that material confidential, thereby preserving its privileged status. To protect against an inadvertent waiver of a client's privilege, parties should enter into a non-disclosure agreement with the funder from the outset.
There is limited legal authority that currently governs the question of costs in funded arbitrations seated in London. However, the general rule in English litigation is that the loser pays the winner's costs. It is often debated as how that rule applies to a situation where one of the parties is involved in a TPF arrangement.
In a 2016 decision of the English Commercial Court, a successful claimant in arbitration was allowed to recover its TPF costs, on the terms agreed with the funder and in addition to the principal award. A tribunal's jurisdiction to make such an order stems from the English Arbitration Act 1996 which gives the tribunal a general power to award costs as it sees fit. This costs bracket can include the legal and 'other costs' of the parties, which in this case was interpreted to mean the funder's commission.
Arbitral tribunals do not generally have the jurisdiction to issue an adverse costs order against third party funders because the funder is not typically a party to the arbitration agreement, and under section 61 of the English Arbitration Act 1996 a tribunal does not have jurisdiction to make a costs order against a non-party to the arbitration. Third party funders are therefore protected from adverse costs orders when funding arbitration proceedings seated in London. Recent court decisions that have had a profound impact on the English litigation funding market eroded the previous certainty that a funder's liability for payment of the successful parties' legal costs is capped at the funding amount it had provided to the unsuccessful claimant. This development, although significant for funded litigations, has little impact on the funding of arbitrations. Any risk for adverse costs awards is a matter for the funding agreement to deal with and appropriate insurance may be arranged to cover the funded party's liability for an adverse costs order.
Contact Scheherazade Dubash for queries in relation to third party funding for arbitration in England and Wales.
TPF in international arbitration seated in Singapore and related court (including enforcement) and mediation proceedings has been permitted in Singapore since 2017. This was an important step towards reinforcing Singapore's position as the leading Asia Pacific international dispute resolution hub. Singapore's Minister of Law announced on 10 October 2019 that TPF will be extended to domestic arbitrations in 2019 as well as to certain proceedings in the Singapore International Commercial Court (SICC) and mediations connected with those proceedings. However these changes are currently still awaiting implementation.
Only professional funders are permitted to enter into TPF arrangements in Singapore. A qualifying third party funder must carry on the "principal business" of funding dispute resolution proceedings (in Singapore or elsewhere) and have a paid up share capital or managed assets (as defined in the Regulations) of not less than S$5 million (US$3.7m) or the foreign currency equivalent.
Singapore lawyers and foreign lawyers based in Singapore are permitted to introduce or refer third party funders to clients provided they receive no direct financial benefit from the introduction or referral. Lawyers are also allowed to advise or act for their clients in relation to TPF contracts (as long as they do not receive any financial benefits, other than fees for legal services). Foreign lawyers not based in Singapore are free to represent parties in international arbitrations in Singapore and are not regulated by the Singapore legislation. They therefore have even more flexibility in relation to TPF arrangements.
Complete flexibility is provided to TPF contracts, in particular arrangements based on a percentage of the sums recovered and/or conditional fees are permissible for providers of TPF. However Singapore lawyers are not permitted to enter into such agreements, which may make it difficult to obtain TPF for smaller claims.
Singapore has not yet introduced any statutory code of practice, however, many of the usual features of TPF have statutory support.
First, amendments were made to the Legal Profession Rules to address problems of conflicts of interests between legal practitioners and third party funders. Secondly, those rules also address the obligations of disclosure of the TPF arrangement by the Singapore legal representative. There is no similar duty imposed on foreign lawyers in relation to proceedings in Singapore. There may thus be inequality in the disclosure obligations between the parties in Singapore-seated arbitrations where one party is represented by Singapore lawyers and one by foreign lawyers.
There are no regulations or authorities dealing with the recoverable costs in a TPF arbitration so a tribunal may not have jurisdiction to award costs based on any uplift on those costs payable to the funder, following a successful claim (although such an award may be possible under the ICC Rules in some jurisdictions). For this reason, Augusta does not usually require claimants to take out After the Event Insurance (ATE) to cover the risk of an adverse costs award. There are also no regulations requiring a funder to meet any adverse costs order in the event that a claim fails or dealing with whether a TPF arrangement can be a ground for security for costs, particularly in circumstances where there is no obligation on the funder to respond to any adverse costs order. However, this is likely to be something that a tribunal will take into account if an application for security for costs was made, albeit not in itself being conclusive as to a party's financial status.
The law as outlined above is complemented by a trio of soft law instruments developed by industry stakeholders in Singapore to promote best practices in connection with TPF in the city-state. The Law Society of Singapore, Singapore Institute of Arbitrators and SIAC all have guidelines and practice recommendations much of which seek to complete the picture where the statutory framework may be incomplete.
SIAC's Investment Arbitration Rules 2017 (IAR) include explicit provisions on TPF and SIAC is likely to extend similar provisions to the 2021 edition of its international commercial arbitration rules that are currently open for public consultation. The IAR empower the tribunal to order full disclosure of the TPF arrangement including whether the funder has committed to undertake an adverse costs order.
The tribunal can also take into account the TPF arrangement in apportioning the costs of the arbitration.
Contact Dr Dean Lewis for queries in relation to third party funding for international arbitration in Singapore.
TPF in international arbitration and mediation is permitted in Hong Kong. On 1 February 2019, the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 entered into force. This Ordinance amended the Arbitration Ordinance (Cap. 609) and the Mediation Ordinance (Cap. 620) to ensure that TPF of arbitration and mediation is not prohibited by the common law doctrines of maintenance and champerty. This new legislation provides for measures and safeguards in relation to TPF and implements the Code of Practice for Third Party Funding of Arbitration issued on 7 December 2018 by the Law Reform Commission of Hong Kong (the Code of Practice).
The Code of Practice sets out the practices, standards and obligations of third party funders to carry on TPF in Hong Kong. A funding agreement must include a Hong Kong address for service for the third party funder, set out the name and contact details of the specified advisory body responsible for monitoring and reviewing the operation of TPF, and the third party funder must maintain access to a minimum of HK$20m (US$2.6m) of capital. It must also ensure that it maintains the capacity to pay all its debts and cover its aggregate funding liabilities for a minimum period of 36 months.
The third party funder also has to take reasonable steps to ensure that the funded party is made aware of the right to seek independent legal advice on the funding agreement before entering into it. If the funded party confirms in writing that it has taken independent legal advice before entering into the funding agreement, this requirement is deemed to be satisfied.
The funding agreement must state whether (and if so to what extent) the third party funder is liable to the funded party to meet any liability for adverse costs, pay any premium for costs insurance, provide security for costs, and meet any other financial liability.
For the duration of the funding agreement, the third party funder must maintain effective procedures for managing any conflict of interest that may arise. It must not take any steps that cause or may cause the funded party's legal representative to act in breach of its professional duties. Moreover, the third party funder must observe the confidentiality and privilege of all information and documentation relating to the arbitration and the subject of the funding agreement.
The funding agreement must set out clearly that the third party funder will not seek to influence the funded party or its legal representative to give control or conduct of the arbitration except to the extent permitted by law.
Third party funders also have obligations in terms of control. For example, the funding agreement must set out clearly that the third party funder will not seek to influence the funded party or its legal representative to give control or conduct of the arbitration except to the extent permitted by law. As for disclosure requirements, the funder must remind the funded party of its obligation to disclose information about the funding agreement under sections 98U and 98V of the Hong Kong Arbitration Ordinance (Cap. 609).
The HKIAC 2018 Administered Arbitration Rules (HKIAC Rules) explicitly refer to TPF. The HKIAC Rules provide that if a funding agreement is made, the funded party shall communicate a written notice to all other parties, the arbitral tribunal, any emergency arbitrator and HKIAC of the fact that a funding agreement has been made, as well as the identity of the third party funder. Finally, under the HKIAC Rules, the tribunal can take into account any funding agreement in determining all or part of the costs of the arbitration.
Contact Dr Dean Lewis for queries in relation to third party funding for arbitration in Hong Kong.
TPF is permitted in France and is considered a positive development towards access to justice. However, it remains fairly unregulated. The lack of legislative or regulatory framework at the national level stems, in part, from the relatively low cost of litigation in France as compared to common law countries. Moreover, punitive damages do not exist under French law and courts generally grant modest fees to the winning party compared to the actual costs that might have been incurred. As a result, the potential sums to be recovered by the funders are relatively low.
Although there has not yet been a significant need for TPF in French litigation, arbitration practitioners have recently reflected on TPF in French law. On 21 February 2017, the Conseil de l'Ordre of the Paris Bar adopted a resolution (1-page / 181KB PDF, the Resolution) and released a report (11-page / 684KB PDF, the Report) in support of TPF particularly in relation to international arbitration. To date, the Resolution and the Report are the only documents to address TPF in arbitration under French law.
Both the Resolution and Report confirm that no provision of French law "prevents a party from using the services of a third party to finance an international arbitration procedure" and that TPF is in the interests of clients and counsels alike.
The Resolution also establishes ethical rules to protect attorneys and their clients. Any attorney representing a party funded by a third party funder is bound by his or her ethical obligations only to his or her client, the funded party. Moreover, an attorney representing a funded party cannot advise the third party funder in any way, even if asked by the client. In particular, an attorney must receive his or her instructions only from the funded party, and must refrain from communicating any type of information concerning the case to the third party funder.
As of today, there is no legislation in effect in France that would question the validity of TPF arrangements. French courts have addressed funding agreements in one case and held that such an agreement was a sui generis contract.
However, TFP contract fee arrangements must comply with some general provisions under French law. Indeed, such fee arrangements must meet the conditions set out by article 1128 of the French Civil Code which are: (i) the consent of the parties, (ii) their capacity to contract and (iii) a lawful and certain content.
Moreover, French Courts might intervene and regulate the TPF contract fee arrangements. The French Cour de cassation might sanction any success fee which is excessive for the services rendered. As a result, such jurisprudence might apply to TFP and may lead to a reduction of the funder's fees if considered excessive.
The Resolution and Report highlight the main features and challenges posed by TFP under French Law: the impact of the involvement of a third party on the ethical obligations incumbent on counsel – particularly with regards to conflicts of interest and professional secrecy – and the issue of disclosure of the funding arrangement.
Article 4.1 of the Règlement Intérieur National de la profession d’avocat (RIN) imposes ethical obligations on French lawyers and prohibits the representation or the defence of more than one client in the same case.
The counsel of the funded party must have an exclusive relationship with its client without any interference and communication with the funder. The relationship between the funder and the funded party must be considered as a factual relationship, independent from the one between the attorney and his client.
However, this principle does not preclude the attorney from receiving direct payment or indirect payment from the funder as French law authorizes the payment from a third person.
In France, the common law concept of privilege is covered by professional secrecy, which imposes criminal liability on lawyers for breach of confidentiality obligations.
As the Paris Bar Council Resolution clarified, the third party funder is not the client. Lawyers are not to advise the third party funder, receive instructions from the third party funder, communicate any information concerning the case, or meet with the third party funder in the absence of the client. Accordingly, French lawyers may not communicate any information concerning the case to the third party funder as this information is privileged. Practically speaking this means that it falls on the client to keep the third party funder in the loop during the arbitration.
As any information communicated to the third party funder by the client will not be covered by privilege or professional secrecy, it is highly recommended that the client and the third party funder enter into a confidentiality agreement at the outset of the relationship.
According to the Paris Bar Council, any French attorney representing a funded party should encourage his or her client to disclose to the tribunal the existence of TPF. Although there is no mandatory requirement to such disclosure, French law provides that both parties and arbitrators shall act diligently and in good faith in the conduct of the proceeding. Disclosure of the existence of TPF to the tribunal might thus be considered as part of the good faith imposed upon the parties.
The Paris Bar Council also advises attorneys to warn the client of the possible consequences that such non-disclosure may entail, in particular with regard to the potential nullity of the award and the obstacles to its enforcement.
Contact Frédéric Gillion for queries in relation to third party funding for arbitration in France.
TPF is permitted in the United Arab Emirates
The UAE is made up of seven Emirates with local courts that are often referred to as 'onshore' courts. As the onshore UAE legal system is based on civil law, it has not inherited many of the historical impediments to TPF (notably champerty and maintenance) faced by common law jurisdictions. In addition, the UAE has a number of commercial 'free zones' where companies can set up and do business under the rules of the particular free zone ('offshore' UAE). Two of these free zones, the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (the ADGM), have their own independent legal systems and courts. The amount of regulation for TPF across these jurisdictions differs.
Parties doing business in the UAE have the option to agree that disputes will be resolved by arbitration. Parties can choose between having the arbitration seated in onshore UAE, in the DIFC or in the ADGM. In the case of an onshore seat the arbitration will be governed by the UAE Federal Arbitration Law (Law No. (6) of 2018). Arbitration seated in the DIFC will be subject to the DIFC Arbitration Law (DIFC Law No. 1 of 2008) while arbitration in the ADGM is governed by the ADGM Arbitration Regulations 2015.
There are no rules or laws that expressly prohibit TPF in onshore UAE but the question of whether it is permitted under UAE law is yet to be definitively tested in the UAE courts. Some commentators have argued that TPF promotes access to justice and is therefore aligned and consistent with principles of sharia law. The position that TPF is permitted in the UAE is also supported (at least by implication) by DIAC releasing draft arbitral rules in 2018 which make reference to funding in the context of apportioning costs (although these rules are yet to be implemented) as well as the DIFC and ADGM taking steps to regulate the use of TPF.
Some commentators have argued that third party funding promotes access to justice and is therefore aligned and consistent with the principles of sharia law.
TPF in proceedings before the DIFC courts is permitted. In March 2017, the DIFC courts issued a Practice Direction on TPF which clarifies the requirements that funded parties must observe in the DIFC courts, and how they should interact with funders in legal proceedings. The Practice Direction requires funded parties to disclose the existence of a funding arrangement and identity of the funder without necessarily divulging confidential terms (unless ordered to by the court). While the DIFC Arbitration Law is silent regarding TPF in DIFC seated arbitrations, the fact that it is permitted before the DIFC courts suggests by implication that it would be permitted in arbitration.
TPF in the ADGM, whether in relation to court or other proceedings (eg. arbitration) appears to be permitted by operation of Article 225 of the ADGM Courts, Civil Evidence, Judgments, Enforcement and Judicial Appointments Regulations 2015 (ADGM Courts Regulations), unless the matter relates to proceedings that cannot be the subject of an enforceable conditional fee agreement, or to any proceedings specifically prescribed by the Chief Justice and provided other criteria are met.
The UAE Arbitration Law is based on the UNCITRAL Model Law and does not include any prohibition on the use of TPF in arbitrations such that, as with litigation, there is no express prohibition on TPF and its use in arbitrations in the UAE has increased over the last few years and continues to do so.
The lack of specific TPF regulation means there is uncertainty surrounding the permissibility of TPF onshore in the UAE. Lawyers recommending TPF or advising clients in relation to TPF should consider whether such arrangements are in accordance with their professional obligations (e.g. whether funding is in the best interest of the client, potential conflicts of interest etc). There may also be other relevant considerations, for example, whether a potential funder is appropriately licensed to provide funding.
The DIFC courts have issued a mandatory code of conduct (12-page / 195KB PDF) for legal practitioners registered with the DIFC Courts that regulates TPF in DIFC court proceedings. However, there is no equivalent for arbitrations seated in the DIFC. In broad terms, DIFC lawyers must advise their clients on the effect of the funding agreement and only recommend the use of TPF when it is in the client's best interests.
TPF arrangements in the ADGM free zone are highly regulated. They are also prescriptive as to who can provide funding and impose various obligations on funders. Notably, the ADGM Regulations apply to any proceedings including arbitration.
In addition to the regulations in the DIFC and ADGM in regards to TPF fee arrangements, it is worth noting that the UAE takes a strong position on contingency/conditional fee arrangements. Both the UAE and DIFC prohibit contingency or damage-based arrangements between lawyers and clients namely, where the lawyer takes a share in the proceeds of the outcome of litigation or arbitration proceedings. However, this prohibition does not extend to agreements between a funded party and the funder. Conditional fee arrangements (CFAs), where a lawyer receives an uplift in fees in the event of success but not a share in the proceeds, are permitted provided the success fee is clearly quantified. CFAs and damages-based agreements between clients and lawyers, whether relating to court or arbitral proceedings, are permitted in the ADGM provided they comply with the requirements in sections 222 to 224 of the ADGM Court Regulations.
In terms of recovery of TPF funding costs in UAE seated arbitrations, the UAE Arbitration Law only provides for recovery of the fees and expenses of the tribunal and any tribunal appointed experts. The ability for a party to recover funding costs in arbitrations seated in onshore UAE is therefore likely to turn on the arbitration agreement, any separate ad hoc agreement between the parties and the agreed institutional rules. The DIFC Arbitration Law allows tribunals greater discretion in the award of costs but is otherwise silent on whether funding costs are recoverable. While there may be some scope to argue that funding costs fall within the tribunal's jurisdiction in regards to costs, there is no definitive decision on this issue. For ADGM seated arbitrations, the ADGM Regulations (Art. 225(8) & (10)) appear to permit tribunals to take account of funding costs when making cost awards.
It is unlikely that a funder in arbitration proceedings would be held liable for adverse costs as an arbitral tribunal has no jurisdiction to make costs orders against a party other than the parties to the arbitration agreement, although consideration would need to be had to the arbitration agreement, any separate ad hoc agreement between the parties and the agreed institutional rules.
While there is no concept of legal professional privilege or litigation privilege in the UAE, legal professionals are subject to obligations of confidentiality. Communications and agreements with third parties (including funders), which are likely to include sensitive information and which may be a target for disclosure requests, should be protected through confidentiality agreements.
In Switzerland, it is recognized that TPF plays an important role in increasing access to arbitration for some parties. In a landmark decision of 2004, the Swiss Federal Supreme Court held that TPF is permissible under Swiss law and protected by the principle of freedom of commerce guaranteed by the Swiss Constitution.
Attorneys practicing in Switzerland are obliged, depending on the specific circumstances, to make their clients aware of the possibility of TPF and to advise them regarding the conclusion of the TPF agreement.
There is no specific legislation in Switzerland regarding TPF in arbitration. However, existing provisions in various parts of Swiss legislation protect attorneys and their clients when it comes to TPF. For example, in view of their professional duty to avoid conflict of interests, attorneys are not allowed to advise and represent their client and at the same time be in a relationship with the funder so that they have an own interest in the funding.
A TPF agreement between the funder and the client usually provides for certain control and participation rights of the funder regarding the case strategy and management, thereby influencing the attorney-client relationship. In principle, such control and participation rights of the funders are permissible. However, in the event of a conflict of interest between the funder and the client, the attorneys owe their professional and fiduciary duties to the client.
There is no obligation or best practice in Switzerland that parties must disclose being funded in a Swiss-based arbitration. However, some authors argue that such an obligation exists under specific circumstances.
The IBA Guidelines on Conflicts of Interest in International Arbitration, as revised in 2014, provide that any legal or physical person having 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. Consequently, a conflict of interests may arise, for example, in a scenario in which an arbitrator in Case A is serving as counsel to claimant in Case B that is financed by the same funder as claimant in Case A. Such a scenario might require the disclosure of the TPF in order to exclude possible negative consequences on the arbitration or the enforcement of the arbitral award.
Furthermore, claimants, of course, are free to disclose the TPF to strengthen their negotiating power.
Contact Roger Büchi, Attorney at Law, Blum & Grob Attorneys at Law Ltd for queries in relation to third party funding for arbitration in Switzerland.