Joinder of Third-Party Funders in International Commercial Arbitration - Where Should We Go Now?
The recently concluded 2018 Report of the ICCA-Queen Mary Task Force on Third-Party Funding (TPF) in International Arbitration was centred around the objective of “identification of issues that arise in relation to third party funding in international arbitration”.[i] The Task Force clearly identified that “modern forms of third-party funding are no longer new to international arbitration”[ii] and recognised that the discussion regarding TPF had moved beyond questions about “whether third party funding should be permitted”[iii] to “evaluation of how to address specific issues implicated by TPF”.[iv] An issue which appears to be unaddressed in the current academic discourse is the joinder of third party funders (TPFs) in international arbitration. The imminent need to focus on the joinder of TPFs stems from the fact that extension theories in international arbitrations constitute exceptions to the most fundamental feature of arbitration, i.e., the consensual nature of arbitration. As a consequence, the status of TPFs within the arbitration proceedings remains uncertain.[v] Scholars, as well as international organizations, demand further research on the issue of whether TPFs can be joined as parties to arbitration proceedings.
Introduction to Third-Party Funding in International Arbitration
The practice of TPF in International Commercial Arbitration (ICA) is no longer a hypothetical question[vi], but a phenomenon which has garnered sufficient traction and credibility in the arbitration community. TPF has, thus, established itself as a legitimate commercial practice[vii]. Even though litigation financing is not a novel concept in practice across jurisdictions, its manifestation in an identical form by the way of TPF in arbitration is indeed novel and has attracted much attention from many academic scholars and arbitral institutions.
Much academic discourse in relation to TPF has centred around conducting a stakeholder benefit analysis and discussing issues arising from TPF which, inter alia, include issues with regard to tribunal composition, contractual level of power exercised by funders, conflicts of interest and disclosure requirement. Notably, TPF has been described as both a panacea and a plague[viii] and a perusal of available academic literature with regard to TPF highlights the same. Despite certain authors considering TPF as the “best thing since sliced bread”[ix], other scholars have considered TPF as the “arbitration antichrist”.[x]
However, as stated above, an issue which appears to be unaddressed is the joinder of TPFs in arbitration proceedings because most scholars often equate TPF with insurance contracts and contingency fee arrangements thereby deducing that a TPF does not become a party to the arbitration proceeding. Such an approach, in the opinion of the author, is counter-intuitive as it fails to appreciate and take into account the distinction between an active and passive funder in the arbitration process.[xi] The identification of the true nature of the funder assumes pivotal importance for determining whether the funder can be joined as a party to the arbitration proceedings by applying the theories on the extension of the arbitration clause to non-signatories. Extension theories are regularly applied to non-signatories in ICA, however, their application is very limited in Investment Arbitration. This is primarily because proceedings in Investment Arbitration are governed by provisions of the relevant treaty.
Further, despite the increased attention, the question of joinder of non-signatories or third-parties to arbitration still remains unexplored due to its complexity which encompasses issues pertaining to the applicable national law, identifying whether there is implied or express consent and applicability of tests such as alter ego and lifting of the corporate veil. This is the gap which requires further deliberation and hence, in view of the author, the next direction in which discussions pertaining to TPF should proceed. The reasons owing to which regulation of TPF has been elusive lie not only in its relative novelty but also in the vast range of funding arrangements available and the great diversity of funds providers.[xii] However, TPF easily distinguishes itself from others, such as bank loans transactions, on the basis of its much more extensive and in-depth assessment and monitoring procedures.[xiii]
In his book, Von Goeler has rightly noted that at the root of the concerns about the risks and pitfalls of TPF lies the fact that the involvement of third-party funders renders the bipolar contractual arbitration more complex.[xiv] Funders will retain a certain degree of control over the arbitral proceedings but they will virtually never have agreed to arbitrate the dispute it is funding.[xv] This leads to a difficult situation where funders, though have a significant economic interest in the arbitration and obtain control over it, are not bound by the arbitration agreement thus not subject to the arbitral tribunals’ jurisdiction. In other words:
“This discrepancy between arbitral consent and economic involvement might alter the procedural dynamics of an international arbitration, affect the procedural rights and interests of the parties, raise new procedural issues and prompt new procedural motions, and thereby modify the ordinary course of the proceedings.”[xvi]
Extension Theories in International Arbitration for Joinder of Third Party Funders
The theoretical constructs in relation to non-signatory parties, and in particular TPFs, is ultimately premised on ascertaining implied consent to arbitrate, where the formal requirement of signature is missing. All theories, non-signatory theories and traditional theories of contract law, take the same contractual approach to the issue of arbitration and third parties so that courts and tribunals can choose to refer to the one that is closer to their legal tradition and background.[xvii] Nevertheless, it is pertinent to note that although interrelated, the various theories affecting non-signatories remain self-standing theories, so that implied consent must be inferred entirely by reference to at least one theory, rather than by reference to different parts of several theories.[xviii]
In his book, Von Goeler has identified and segregated two procedural scenarios whereby an arbitral tribunal may rule on its jurisdiction over TPFs. In the first scenario, TPFs might become an additional party to the arbitration and in the second scenario, the funder might substitute the funded party altogether.[xix] He further elaborates by observing that TPF might have a ‘negative impact on the tribunal’s control over parties and counsel if behind the scenes TPFs are making the key decisions’[xx]. This is because in the absence of inclusion of the funder, the arbitral tribunal is only competent to regulate the impact of a funder’s involvement in the proceeding, ‘indirectly, through its powers over the funded party’,[xxi] even where the funder is perceived to be the real player in the arbitration. From the perspective of the non-funded party, the inclusion of the funder in the main arbitration proceedings assumes pivotal importance for primarily three discernible reasons: (1) to establish liability[xxii] (2) for security of costs[xxiii] (3) efficient enforcement of the arbitral award.
Transparency of TPF in the Arbitration Context (Disclosure and Confidentiality)
A precursor to the discussion about joinder of TPFs in arbitration proceedings primarily revolves around the issue of whether disclosure of TPF is mandatory or discretionary as it is only thereafter that a Tribunal will indulge in the exercise of determining the extent of involvement of TPFs in the negotiation and performance of the parties’ contract. Some concrete guidance, in recent times, concerning TPF has been provided by the Code of Practice for Third-Party Funding of Arbitration (Arbitration Ordinance Chapter 609) passed by Hong Kong (hereinafter referred to as “the Code of Practice”) and the Civil Law(Amendment) Act and the Civil Law (Third Party Funding) Regulations 2017 passed by Singapore. Nonetheless, there is no automatic disclosure of the existence of TPFs mandated by either of the aforementioned legislations or any of the leading arbitral jurisdictions and institutions, which leads to the likely inference that disclosure of TPFs is discretionary.
If so, the next query that emerges is under what circumstances should the discretionary disclosure be made. Funded Parties and Tribunals will be reluctant to disclose or order the production of the funding agreement, as funding legal proceedings is a private matter and may give rise to issues of contractual confidentiality given that “most funding agreements contain confidentiality provisions.”[xxiv] Perhaps, most arbitration institutions do not seem to consider how a party funds its claim as an important parameter for formulating strict regulations regarding disclosure. As a result, arbitral institutions often ignore the impact of the funding arrangement on the constitution of the arbitral tribunal, since one of the appointed arbitrators may have a conflict of interest with the TPFs. In this regard, General Standard 7(a) of the IBA Guidelines on Conflicts of Interest in International Arbitration provides that:
"A party shall inform an arbitrator, the Arbitral Tribunal, the other parties and the arbitration institution or other appointing authority (if any) of any relationship, direct or indirect, between the arbitrator and the party (or another company of the same group of companies, or an individual having a controlling influence on the party in the arbitration), or between the arbitrator and any person or entity with a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration. The party shall do so on its own initiative at the earliest opportunity."
One more reason which necessitates disclosure of TPF is for fixation of costs. There may exist situations wherein the funded party is unsuccessful and, by itself, incapable of paying the costs. The successful party in such a case would be unable to recover money from the funder, due to lack of knowledge of their identity as well as the funder not being a party to the arbitration. Thus, knowledge about the funder helps in fixation of costs on each party.
Finally, confidentiality stands for a strong reason for disclosure of the identity of the funders. Often parties to an arbitration chose rules or laws which impose requirements of confidentiality regarding the arbitration proceedings on the parties as well the arbitration. In order to ensure that this confidentiality remains and to assess whether third parties are bound by it or not, disclosure is important.
In the context of India, neither the Arbitration and Conciliation Act, 1996 nor its subsequent amendments in the year 2015 and 2019 have addressed the issue of TPF, let alone acknowledged it. The tort of champerty and maintenance has, in most common law jurisdictions, provided the maximum resistance for transactions involving TPFs. However, recent trends indicate common law countries like Hong Kong and Singapore have abolished champerty and maintenance in favour of regulating TPF[xxv] in international arbitration. Despite judicial dicta observing that the tort of champerty and maintenance are inapplicable to the Indian legal scenario, no law expressly allows TPF in arbitration in India.[xxvi] In the aforesaid backdrop, the author feels that if India aims to be an “arbitration hub” then it is imperative that India keeps afoot with latest developments in international arbitration and one possible way to do the same is acknowledging TPF as a viable commercial practice for impecunious Parties and regulating the same.
[i] Chapter 1: Introduction, ICCA Reports No.4: Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, ICCA Report Series, Volume 4, International Council for Commercial Arbitration, at Pg. 1-16 (2018).
[ii] Id at Pg.2.
[iii] Id at Pg. 3.
[v] D. G. Henriques, Third-Party Funding: A Protected Investment?, 2017 (30) Spain Arbitration Review, Revista del Club Español del Arbitraje, Wolters Kluwer España 100 – 140 (2017).
[vi] Marc Krestin and Rebecca Mulder, Third-Party Funding in International Arbitration: To Regulate or Not to Regulate?, Kluwer Arbitration Blog, available at http://arbitrationblog.kluwerarbitration.com/2017/12/12/third-party-funding-international-arbitration-regulate-not-regulate/?doing_wp_cron=1598722743.0059421062469482421875.
[vii] Supra Note 2.
[viii] Susanna Khouri, Third Party Funding in International Commercial and Treaty Arbitration-A Panacea of a Plague? A discussion on the risks and benefits of Third Party Funding, 8 Transnational Dispute Management (2011).
[ix] S. Perry, Third-Party Funding: The Best Thing Since Sliced Bread?, Global Arbitration Review (2012).
[x] Supra Note 9.
[xi] On the distinction between active and passive funders, see Cento Veljanovski, Third party litigation funding in Europe 8 Journal of Law, Economics and Policy 408 (2012). See also the decision of the Privy Council, in Dymocks Franchise Systems (NSW) Pty Ltd v. Todd & Ors (No.2) (New Zealand),  UKPC 39, 21 July 2004; Maxi Scherer and Aren Goldsmith, Third party funding in international arbitration in Europe: Funders’ Perspectives 2 RDAI/IBLJ Roundtable 210–211 (2012).
[xii] M Stoyanov & O Owczarek, Third-Party Funding in International Arbitration: Is It Time for Some Soft Rules? 2 BCDR Intl Arb Rev 171, 173 (2015).
[xiii] J Lyon, Revolution in Progress: Third-Party Funding of American Litigation 58 UCLA Law Review 571, 593 (2010); C Hendel, Third Party Funding Spain Arb Rev 67, 77 (2010).
[xiv] J Von Goeler, Third-Party Funding in International Arbitration and Its Impact on Procedure, Kluwer Law International (2016).
[xvi] Supra note 15.
[xvii] Gary Born, International Commercial Arbitration, 1204 (2nd ed., 2009): “Whatever legal construct is utilized, the beginning and ending question is ordinarily whether the parties, with their actions considered objectively and on the basis of commercial good faith, intended that a particular entity be a party to the arbitration clause. This question arises in numerous contexts-ranging from implied assent, to guarantee, to incorporation and assumption, to subrogation, to agency, to group of companies’ analysis-but the fundamental inquiry remains the same in each case.” See also, CfW Park, Non-signatories and International Contracts: An Arbitrator’s Dilemma, Multiple Party Actions in International Arbitration (Oxford University Press, 2009).
[xviii] Stavros L Brekoulakis, Third Parties in International Commercial Arbitration, Oxford International Arbitration Series (2010).
[xix] J von Goeler, Third-Party Funding in International Arbitration and Its Impact on Procedure (2016). The first scenario is explained by Von Goeler as the inclusion scenario where the non-funded party seeks to compel the funder to arbitrate as an additional party on the side of the funded party by arguing that the funder is also bound by the arbitration agreement. In the second scenario If the funded party assigns its rights under the contract containing the arbitration clause to the funder, the funder may be bound by this clause by way of substituting the funded party, which in turn ceases to be a party to the arbitration agreement.
[xx] Waincymer, Procedure and Evidence in International Arbitration, 608 (2012).
[xxi] Goldsmith & Melchionda, Rev. Dr. Aff. Int. 221, 228 (2012).
[xxii] The funder may be believed to be an entity with deeper pockets when liability is at issue. That is conceivable, for example, where a parent company assumes the role of third-party funder by paying for the arbitration costs of its respondent subsidiary.
[xxiii] A non-funded respondent may seek inclusion in order to obtain an order for costs or security for costs directly against the funder, notably in case the funded party will likely be unable to pay a potential adverse costs award.
[xxiv] Alison Ross, The dynamics of third-party funding, 7(1) Global Arbitration Review 19 (2012),.
[xxv] Christine Sim, ‘Third Party Funding in Asia: whose duty to disclose?’, Kluwer Arbitration Blog, available at http://arbitrationblog.kluwerarbitration.com/2018/05/22/third-party-funding-asia-whose-duty-disclose/.
[xxvi] Ram Coomar Coondo v. Chunder Canto Mukherjee, AIR 1954 SC 557; Unnao Commercial Bank Ltd v. Kailash Nath, AIR 1955 All 393; Lala Ram Swarup v. The Court of Wards (1940) 42 Bom L.R. 307; Rattan Chand Hira Chand v. Askar Nawaz Jung (Dead) by LRs (1991) 3 SCC 67.
This article is authored by Mr. Gautam Mohanty, Advocate and Lecturer at Jindal Global Law School. The author wishes to thank Mr. Raghav Bhargava for his able assistance. This blog is a part of the RSRR Excerpts from Experts Blog Series, initiated to bring forth discussion by experts on contemporary legal issues.