Who are third-party funders
In arbitration, third-party funders are organizations or people who lend money to one of the parties in exchange for a percentage of the eventual award or settlement. These funders support one of the parties financially to pay the costs of the arbitration proceedings even though they are not personally involved in the dispute. In recent years, third-party funding in arbitration has grown in popularity and is frequently employed by claimants who lack the financial resources to prosecute their claims on their own.
Specialized finance corporations, investment firms, private equity funds, or even individual investors, can act as third-party funders. Before choosing to offer to fund, they evaluate the claim’s merits and prospective worth. They might provide financial aid to cover a range of costs, including attorney fees, expert witness fees, and administrative charges, third-party funders often get a share of the winnings in exchange for their financial support.
This portion may be determined as a multiple of the invested monies or as a percentage of the award or settlement. The financed party and the funder typically enter into a contract outlining the precise terms and circumstances of the funding agreement and tribunal fees, if they think the claim has a good probability of being successful.
It’s crucial to remember that third-party funding agreements in arbitration are governed by particular laws and ethical standards, which may differ depending on the country. By maintaining openness and safeguarding the interests of all parties concerned, these rules seek to uphold the arbitral process’s fairness and integrity.
The Impact of Third-Party Funding on Arbitration: Challenges and the Necessity for Disclosure
Undoubtedly, arbitration has experienced significant growth and importance on the global stage. It has become a widely used method for resolving international disputes. However, the cost of arbitration has been rapidly increasing, posing challenges to its accessibility. To address this, third-party funding (TPF) has emerged as a means of making arbitration more affordable and available to a wider range of individuals. TPF has expanded the accessibility of arbitration and provided investment opportunities.
Third-party funders invest in arbitration proceedings in the hopes of making money. While the amount of money has increased, there are now worries about potential conflicts of interest. Conflicts of interest have the potential to compromise the fairness of the arbitration process. The dynamics of arbitration processes are strongly impacted by the presence of third-party funding, notably the interaction between the parties, funders, and arbiters or tribunals. This relationship is crucial since it has a significant impact on the fairness of the proceedings. Funders’ involvement can raise questions about the impartiality and independence of arbitrators.
Conflicts of interest among arbitrators pose a threat to the overall fairness of the proceedings, hindering the pursuit of justice. To address this issue, one possible solution is the disclosure of third-party funding. This involves revealing the existence of third-party funding, identifying the funders, and potentially disclosing the terms of the funding arrangement. Such transparency measures can help regulate the impact of third-party funding on the arbitration process.
The obligation to disclose third-party funding (TPF) is rooted in the goal of ensuring justice through impartial means. Each party has the right to be fully informed about the relationships and potential consequences that may arise from such funding arrangements. This information enables them to assess the impartiality and independence of their arbitrator. Moreover, disclosing the identity of funders at the outset saves time and resources, as arbitrators are not required to investigate funders for each case.
The tribunal can avoid additional expenses and responsibilities by reporting TPF early on in the proceedings. To avoid having to go through the full procedure just to have the award declared unlawful later, the proceedings might be canceled at the outset if there is a conflict of interest. Arbitrators have occasionally expressed their support for full disclosure. For instance, the Arbitral Tribunal compelled the claimants to disclose the contents of the Funding Agreement in the case of Manuel Garcia Armas and others v. Venezuela, citing a need to preserve the integrity of the process.
Regulation and Disclosure of Third-Party Funding in International Arbitration: Striking a Balance for Transparency and Impartiality
Third-party funding (TPF) in international arbitration is a widely recognized practice, but its regulation remains insufficient. While arbitration rules, such as those by UNITRAL and ICC, cover various aspects of arbitral proceedings, areas like third-party funding are not strictly regulated. This is concerning, given the significant role TPF plays in maintaining confidentiality, transparency, and the independence and impartiality of arbitrators.
The requirement of third-party funding disclosure is, nonetheless, gaining popularity. By making disclosure mandatory, conflicts of interest are less likely to arise and future challenges to awards are avoided. It supports the parties’ right to information about their interactions with funders and arbitrators and encourages transparency in proceedings.
The international community has varied perspectives on the disclosure of TPF in arbitration. Concerns about the privacy and confidentiality of parties and their funding agreements have led to debates about striking a balance between full disclosure and protecting privacy. Nonetheless, finding a middle ground is crucial, and many institutions have been making progress in this regard. Notably, in cases like Sehil v. Turkmenistan, SAS v. Bolivia, and Guaracachi v. Bolivia, tribunals ordered full disclosure to prevent potential conflicts of interest and uphold the principles of independence, impartiality, and justice.
In several countries, including Hong Kong and Singapore, steps have been taken to provide tribunals the right to request information about funding and even to mandate full disclosure of third-party funding. These changes are a result of ongoing attempts to deal with the disclosure problem and guarantee impartiality in arbitration procedures.
Challenges and Considerations in Third-Party Funding for International Arbitration
In international arbitration, third-party funding (TPF) is expanding quickly, drawing a range of financial institutions, law firms, and insurance companies to participate as funding parties. TPF, however, runs into issues and practical difficulties that limit its growth while being widely accepted in arbitration cases around the world. While parties engaging in TPF agreements might also find themselves at a disadvantage, third-party funders do experience some drawbacks.
The absence of regulation is one of the biggest problems TPF is facing. While many nations are accepting and regulating arbitration, there is still no domestic or international regulation of third-party funding. The regularity and legitimacy of TPF practices are unknown as a result of the absence of regulations. The protection of privacy and secrecy is a major issue with third-party funding in arbitration. As part of their agreements, parties seeking finance frequently have to divulge information to the funders, which may jeopardize the party’s interests and confidentiality.
Another important consideration is the disclosure of third-party funding. While it is vital for a party to reveal the presence of TPF in order to resolve any potential conflicts of interest, the party is also within their rights to keep from the arbitrator or tribunal the specifics of their agreement with the funders. Finding a middle ground between taking inflexible positions on disclosure and deciding what information should be released could safeguard the rights of the financed party as well as the fairness of the arbitration process.
The sheer presence of a third-party funder presents difficulties as well. The funder may use its position to exert control over the claim, forcing parties seeking TPF to agree to unfavorable conditions. It is a continuous battle to limit the impact of commercial institutions and sponsors, especially to prioritize the welfare of the party. Funders frequently prioritize maximizing profits and getting a sizeable percentage of the claim, which might take precedence over the goals of dispute resolution and amicable settlement.
The difficulties associated with third-party funding generally cover a wide range of issues, including disclosure, regulation, and upholding the party’s interests throughout the funding process. It is essential to address these issues if we want international arbitration to treat TPF in a fair and impartial manner.
As a process that is constantly changing, arbitration is increasingly coming under more regulation, with an emphasis on helping the parties rather than hurting them. Similarly to this, other institutions and nations are beginning to acknowledge third-party sponsorship. To balance its intended use with any potential hazards, though, is absolutely essential. So far, third-party funding has shown that it can assist parties who are unable to pay the high costs of arbitration in receiving justice.
In addition to making arbitration more accessible and affordable, by resolving the issues with third-party funding in international arbitration, the arbitration will also ensure that the fundamental principle of justice is upheld, as is emphasized by the proverb “Justice delayed is justice denied.”