Third-party funding has obtained a significant role in international arbitration by providing financial support to parties who may not have the means to pursue or defend a claim otherwise.1 It can be a godsend to claimants who might otherwise be unable to enforce their rights. While the advantages of third-party funding are frequently emphasized, it is worthwhile to examine the drawbacks of third-party funding as well, as seeking third-party funding is not always the most strategic course of action.
Ethical Concerns
A concern regarding third-party funding involves potential conflicts of interest. Funders could theoretically exert influence over arbitration proceedings.2 Such behavior could affect the funded party's independence.3
Conflicts of Interest and Disclosure Issues
Arbitration is valued for its confidentiality. However, third-party funding adds an additional level of complexity to the equation, opening a debate surrounding the disclosure of third-party funding agreements. If undisclosed, it could lead to conflicts of interest, potentially resulting in challenging the arbitrator's appointment or requests for security for costs.4 For instance, such a conflict can occur if there is a prior relationship between the funder and an arbitrator.5 On the other hand, the disclosure of the existence and details of funding arrangements can also lead to strategic disadvantages for the funded party. Balancing these conflicting interests is challenging.7 Some jurisdictions and arbitral institutions require the disclosure of third-party funding arrangements. However, the extent of required disclosure can vary, leading to potential inconsistencies and challenges in ensuring transparency while maintaining confidentiality.8
Cost Implications and Recovery
An obvious drawback of third-party funding is that financial support comes at a significant cost. Funders usually require a significant portion of an award, or settlement, as a return for their investment.9 This amount can be quite substantial, frequently between 20 and 40 percent of the compensation awarded,10 meaning that even if the funded party is successful, they may only receive a fraction of the awarded amount.11
There are many ways to reduce the cost of arbitration, whose largest cost element is legal fees. If self-funding of a lower-cost arbitration is possible, then a claimant is more likely to be made whole at the end of the procedure.
Another risk that parties benefiting from third-party funding face is a security for costs application, which, even if unsuccessful, can increase the expenses of the proceedings.12 Additionally, the question of whether the costs of funding can be recovered from the losing party remains disputed and varies across jurisdictions and arbitral rules.13
Difficulties of Securing Third-Party Funding
Securing third-party funding for an international arbitration is extremely difficult, and it is far harder to secure third-party funding than to win an arbitration.
As the funders' return depends on the success of the proceedings and award rendered, third-party funders will conduct thorough due diligence.15 They will consider the particularities of the case, claims, and counterclaims, as well as the probability of recovery and the counterparty's solvency. However, even if the case at hand has a high likelihood of success, the funders may restrain from making an offer.16
Funders often estimate that fewer than 1 in 30 cases is funded. This is a funding rate of approximately 3%, which is far lower than the chance of success of a non-frivolous case. As 97% of funding applications are likely to fail, for a wide variety of reasons (the seat of arbitration, the counterparty, the amount in dispute, whether the claimant has entirely clean hands, the amount of sunk costs, the amount of funding required, enforcement risk, etc.), funding is only likely to succeed for the most black-and-white cases, brought by blameless claimants, with a large amount in dispute and very low enforcement risk. Claimants may spend significant time and costs fruitlessly seeking funding when the self-funding of a lower-cost arbitration was, in fact, possible.
Impact on Settlement
Having a third-party funder involved can make settlement negotiations more complicated. Funders looking to maximize their return may discourage parties from accepting fair settlement offers in the early stages of the proceedings.14 This approach can impact the duration of disputes and increase costs, consequently potentially resulting in less favorable outcomes.
Regulatory and Legal Uncertainty
The legal and regulatory framework surrounding third-party funding in arbitration is still evolving, with significant variations across jurisdictions. This lack of uniformity can create uncertainty for parties considering third-party funding, especially in cross-border disputes involving multiple legal systems.
Conclusion
Although third-party funding opens doors for parties to pursue arbitration when they might not otherwise have the means to do so, and it can be a godsend to certain claimants, it is important to understand the potential drawbacks of third-party funding. Factors such as ethical concerns, conflicts of interest, disclosure issues, the difficulties of securing funding, cost implications, the impact on settlement, and regulatory uncertainty should be considered before embarking on the pursuit of third-party funding.
Footnotes
1. Erdem & Erdem, Third Party Funders in Arbitration (September 2015).
2. Broderick, Bozimo & Company, Third-Party Funding in Arbitration: Pros and Cons (24 October 2023).
3. D. Jiménez, Third Party Funding: advantages and drawbacks (8 August 2016).
4. Norton Rose Fulbright, The third-party funding debate – we look at the risks (September 2016).
5. S. Gilcrest, When Peer Pressure Is Not Enough: Mandatory Disclosure and Third-Party Funding; see also Aceris Law, Disclosure of Third-Party Funding Agreements in International Arbitration (8 February 2020).
7. J. von Goeler, Show Me Your Case and I'll Show You the Money – How to Balance Conflicts Between Third-Party Funding and Confidentiality in Arbitration Proceedings (21 July 2016).
9. Ezgi Ceren Aydoğmuş, Third Party Funding in International Arbitration (6 February 2020).
10. Norton Rose Fulbright, The third-party funding debate – we look at the risks (September 2016).
11. Broderick, Bozimo & Company, Third-Party Funding in Arbitration: Pros and Cons (24 October 2023).
12. Norton Rose Fulbright, The third-party funding debate – we look at the risks (September 2016).
13. Omni Bridgeway, The Current Approach to Recovering Third Party Funding Costs in Arbitration (12 January 2022).
14. Broderick, Bozimo & Company, Third-Party Funding in Arbitration: Pros and Cons (24 October 2023).
15. Norton Rose Fulbright, The third-party funding debate – we look at the risks (September 2016).
16. Norton Rose Fulbright, Third-party funding in arbitration – the funders' perspective (September 2016).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
